Mixing Red Delicious and Granny Smith Apples
When I first looked at this article, I thought “Hmm… another article showing that inflation is understated, and real growth overstated.” But then I read this excerpt:
“That alleged 1.9 percent growth depended on the ludicrous assumption that inflation was just 1.1 percent at an annual rate,” said Stefan Karlsson, an economist based in Sweden.
“If you instead deflate the nominal GDP growth of 3.0 percent with the 4.3 percent increase in the gross domestic purchases deflator, then growth was -1.2 percent,” he wrote on his blog.
I thought it didn’t make sense, after all, every nominal growth figure has its own inflation rate (deflator). Why cross the Gross Domestic [GD] Product nominal growth with [GD] Purchases deflator? The GD Purchases deflator should correspond to the GD Purchases nominal growth rate. GD Purchases grew at a nominal rate of 3.7%, for a real shrinkage of 0.5% annualized. You can see the figures here on page 11, toward the bottom of the page on the right.
But, the article does have a point. The figures for GD Product don’t contain the effects of import prices, like crude oil and other energy imports, and thus they portray a stronger economy. If we are analyzing how the economy is treating consumers, i.e., are they consuming more on an inflation-adjusted basis? Here are the last eight quarterly figures annualized: 2.0, 0.9, 0.2, 1.2, 2.9, 2.6, –1.0, 0.1, and –0.5%. Over the last two years, that’s 1% annualized. Pretty slow. Over the last year, 0.3%, even slower.
Looking at the GD Purchases numbers, you can get a feel for why many consumers, particularly on the low end are feeling as if the economy isn’t doing much for them now. A pity that the series isn’t better known.
August 1st, 20085:41 pm at
Doing some thinking by hand-waving, you could say that aggregate GDP includes Investment and Consumptions.
1) Right now, demand for investment (e.g. new equipment) has dropped as businesses are not expanding as rapidly, if at all.
2) This would lead to deflationary pressure on investment leading.
3) Thus, aggregate GDP growth might overstate the expected value for investment and understate the expected value for consumption as you have observed.
A few things can be postulated:
A) If businesses were actively trying to decrease inventory, lower prices may have been accepted, leading to deflationary pressures.
B) This implies that once inventory bottoms, the deflationary pressure will cease, leading to higher reported estimates of inflation.
C) This creates a smoothing effect on GDP. At the beginning of a slowdown, GDP Inflation will be Understated and GDP Growth will be overstated, and at the end of a slowdown, GDP Inflation will be overstated and GDP Growth will be understated.
-Cedric
August 1st, 20087:52 pm at
Remember the “misery index” … Reagan ?
I think we’re (getting) there again.