A Comment on GDP and Other Year-End Statistics

On Friday, January 27, 2012 the first advanced reporting of fourth quarter 2011 GDP statistics were released. They estimated a GDP growth of 2.8 percent. That followed a third quarter GDP number of 1.3 percent and a first half 2011 of only 0.8 percent. At first glance, it would appear economic growth was on the rise, supporting the claims of politicos and pundits that recovery is on the way (once again). But a closer look shows the U.S. economy remains stagnate.

A normal historical growth rate for the U.S. economy is about 2.5 percent. But that’s a long-run average pre-2007. That 2.5 percent average is well below what is normal for a recovery from a recession at the current stage 2 years after 2009. In past recession recoveries, the GDP growth rate is normally 4 to 5 percent. For the entire last year of 2011, actual GDP rose only 1.7 percent. That’s less than half the normal rate at this stage for a recession recovery.

But even that 1.7 percent average for all of 2011 assumes the official 2.8 percent last quarter was really 2.8 percent. It wasn’t. It was really around the same 1.0 percent rate that marked the first nine months of 2011. To begin with, the fourth quarter 2.8 percent number will likely be revised downward to 2.7 or even 2.6 percent in the next two revisions that typically follow reporting of first estimates of GDP. But let’s not even count that reduction yet. Let’s start from the reported 2.8 percent.

Problems With Estimates

The first problem with the fourth quarter estimate of 2.8 percent is that 1.9 percent of that total was due to business inventory buildup in the fourth quarter, which means it won’t last. In the preceding third quarter 2011, inventory building by business collapsed to almost zero. The 1.9 percent, therefore, reflects recovery of the inventory buildup that didn’t occur in the third quarter 2011, but got put off to the fourth quarter. So the 1.9 percent for 2011 fourth quarter inventory buildup was really only around 1 percent. That means 1 percent should be deducted from the total 2.8 percent GDP fourth quarter growth. That means GDP grew only by 1.8 percent in the fourth quarter—not 2.8 percent.

Here’s where the second problem comes in. The 2.8 percent is called real GDP, that is, GDP that is adjusted for price inflation. The specific price index that is used to adjust for inflation for GDP is called the GDP deflator. If that deflator reports a very low inflation rate, the real GDP growth will be higher.

The GDP deflator claimed that inflation in the fourth quarter of 2011 was a mere 0.4 percent. Does anyone believe that? The true inflation rate for the fourth quarter has to have been, at minimum, at least 1 percent. That’s 0.6 percent higher than the 0.4 percent that was officially reported. That 0.6 percent should therefore be subtracted from the adjusted 1.8 percent GDP growth rate in the fourth quarter. The real GDP should be around 1.2 percent—that is, just about the 1 percent rate of GDP growth that occurred throughout all of last year.

Fourth Quarter Problems

There are a host of other problems with government statistics for the fourth quarter as well, for example, reporting on jobs. The 200,000 job growth reported by the Labor Department was not the true number of actual jobs created. The 200,000 is a statistic, that is, a manipulation of the raw, true jobs data that is then adjusted for seasonality assumptions by the Labor Department, new business formation assumptions, and other operations on the data. These adjustments typically tend to boost the real job numbers during the year-end holiday season higher than the actual number. The Labor Department’s seasonal and other adjustments were more accurate before 2007, but are now significantly less so in the current recession and stagnant recovery that makes the present economic downturn unique.

As one example, the seasonal adjustment for December 2011 reported 42,000 hires of couriers and messengers—i.e., workers hired by UPS, FedEx, etc.—to accommodate temporary surges in parcel mailings. These workers are typically laid off after the holidays. But the 42,000 reported was actually 86,000 messengers and couriers, most of whom will be laid off soon in 2012. Another related problem is the seasonal adjustment of workers hired in retail, another part-time surge in the holiday season. The Labor Department grossly underreported those numbers as well. Those workers, too, will be laid off in huge numbers during the first quarter of 2012.

Retail Sales

A look at what really happened to retail sales in November-December is also revealing. Despite the hype around a record holiday season, the facts that came out in January showed that retail sales rose only 0.1 percent in December and most of that was due to car sales. Minus auto sales, retail sales declined in December 2011 compared to the year earlier, the first such fall since May 2010—despite record price discounting. Even that poor retail sales performance was driven by the rising use of credit cards or by consumers dipping into savings for holiday spending. The latter was not surprising, given that wages and salaries rose only 1.8 percent (and most of that at the high end) while prices rose double that at 3.5 percent. In other words, real wages and income continued to fall, as they have since 2009. Over the past decade, household income decline has been about 10 percent.

Summing Up

So fourth quarter GDP was really much less than reported. The first quarter 2012 will be little different than 2011—and even possibly much worse should the Eurozone almost certainly experience a severe banking crisis this year. The real outlook for the U.S. economy (not the politico-pundit version) and the real problems in the Eurozone and slowing global economy elsewhere is why the Federal Reserve recently indicated it planned to keep interest rates at zero through 2014, instead of early 2013. It knew the public reporting on the economy for December and fourth quarter was really not all that rosey. The Fed knows that U.S. banks will have to be bailed out again if European banks tank this summer. If that happens, it means a double dip recession this writer has been predicting for no later than early 2013.

Z

Jack Rasmus is the author of An Alternative Program for Economic Recovery and Obama’s Economy: Recovery for the Few (forthcoming from Pluto Press/Palgrave- Macmillan).