In yesterday's post Going For The Trifecta, I quoted an anonymous source about what the advance estimate for Gross Domestic Product (GDP) would be today. My source said—
I spoke yesterday with [so and so] of [well-known website] fame, and he firmly believes that the BEA targets the "consensus" media numbers in their "Advanced" report — eventually revising those to some peculiar version of reality at their leisure (recently up to 24 months later)...
Almost nailed it! The consensus was for 2.1% growth, and today the BEA announced that the economy grew—drum roll, please—2% in the 3rd quarter!
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.0 percent in the third quarter of 2010, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.7 percent.
The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3). The "second" estimate for the third quarter, based on more complete data, will be released on November 23, 2010.
I am not a conspiracy theorist, and usually dismiss the remarks of those who explain that things are screwed-up because They (unspecified) want it that way. There is always a better, more plausible explanation. Despite the efforts of Sigmund Freud, Carl Jung and other depth psychologists to tell people that there is an enormous unconscious part of the mind running most of the show, and that the conscious Ego sits like the visible tip of an iceberg on top of it, people continue to insist that they are in complete charge of what they say and do—these latter, of course, are often at variance with each other.
So while I do not posit a conscious conspiracy at the BEA to make the numbers match, it is what it is. The first downward revision of the politically expedient advance estimate should occur on November 23rd, three weeks after the election. However, the BEA may revise the growth rate downward to reflect "some peculiar version of reality" much later. Second quarter GDP started out at 2.4%, and finally settled in at 1.7% after a few months had passed. Read my post Government Statistics — The Awful Truth. Let's get a little bit deeper into the advance estimate—
The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, nonresidential fixed investment, federal government spending, and exports that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
There are two points of interest here for the aficionado of official goverment statistics. Regarding imports, which subtract from GDP if they exceed exports, we can now see another reason why Timmy Geithner is so threatened by America's large trade deficit. Being a political hack, Geithner necessarily sees the world through the lens of government economic indicators, which may or may not be favorable to the government he represents. If they are not, this is a political disaster. Whether positive indicators are actually reflecting improvements in people's lives is a secondary consideration.
It thus makes sense that Timmy would like to blame China for distorting the import/export balance and dragging down the GDP number, which is the Biggest Indicator of the "wisdom" of his economic policies. No wonder he's in such a rage.
And then there is the boost to GDP from Personal Consumption Expenditures (PCE), which are said to make up 70% of the real economy. I say "said to be" because PCE is a rather nebulous concept. For example, Medicare spending falls under PCE, and there are other atrocities as well. PCE is often conflated with "consumer spending" in general, or sometimes with the retail sales part of that spending.
Rick Davis of the Consumer Metrics Institute tracks online durable goods sales data in real time day after day. This gives us a good (though incomplete) measure of how much Americans are spending. From these data, Rick compiles a Daily Growth Index (DGI) to measure how the economy's doing. The graph below shows us where things stand now.
"The Consumer Metrics Institute's 91-day 'Trailing Quarter' Growth Index -vs- U.S. Department of Commerce's Quarterly GDP Growth Rates over past 4 years. The quarterly GDP growth rates are shown as 3-month plateaus in the graph. The Consumer Metrics Institute's Growth Index is plotted as a monthly average." I updated this graph (pink line for Aug-Oct) to reflect today's advance GDP estimate.
You can easily see that whereas the DGI used to lead and reflect GDP, there is a large divergence between the two in 2010. In other words, spending on durable goods has fallen off a cliff, but GDP remains elevated. Imagine that! Rick's data is further validated in the Gallup polling data I presented in Our Economy Is A Bad Joke. Here are the spending numbers for those making less than $90,000 a year, which is about 88% of the population.
This anemic spending data is hard to reconcile with the change in private inventories, which "added 1.44 percentage points to the third-quarter change in real GDP after adding 0.82 percentage point to the second-quarter change" according to the BEA. Look for that component of GDP to be revised downward in future releases.
Mark Twain referred to "lies, damned lies, and statistics." It's a shame he didn't live in the present, when the fine art of prevarication with statistics has been taken to new, unprecedented levels of sophistication.