Why you Can’t Believe Government Statistics: Part 3 –THE REAL GDP — YES, WE ARE IN A RECESSION

September 11, 2008

Most Americans will tell you in no uncertain terms– yes, we’re in a recession.  But economists and political pundits still find themselves debating the reality we’re all living.  Why? It all comes down to the government’s convoluted twisting of statistics.

The usual definition of a recession is two consecutive quarters (half a year) of declining Gross Domestic Product (GDP).   GDP is the monetary value of all goods and services produced within the borders of the United States.   If a company has a factory outside of the U.S. that output is not included in the GDP.

With jobs and factories leaving the United States you might wonder how our GDP continues to expand.  It is accomplished by the magic of “imputed value.”  Imputed Value is not real goods or services.  It is made up goods.

The most outrageous example is the imputed rental value of owner-occupied houses (OOH).   This is the average market rent all homeowners who live in their homes would get “IF” they rented their homes.  Only problem, of course, is they do NOT rent their homes.  They live in them!   And yet, somehow the government has decided to include this ficticious number as part of the GDP.  It is impossible to comprehend how imputed rental value has anything to do with goods produced in the United States.

But wait.  It gets worse.  OOH value makes up more than 10% of our GDP.  Yes, 10% of our GDP is imputed (made up) and not goods or services we actually produce.   We have used OOH since the 1960’s, but back then it was only 5.9% of the GDP.  Since then, it’s nearly doubled as we struggle to maintain the fiction of growth by using imputed value, while at the same time shipping more jobs and factories overseas.

To measure real growth in the value of goods and services, inflation has to be deducted from the raw growth figures.  The Commerce Department recognizes this and uses what it calls a “deflator.” The deflator is supposed to factor out inflation and, as a result, measure real value.

Check out the numbers.  In the first quarter of 2008, the Commerce Department reported GDP growth at .9%– which is not great, but still positive.  If Commerce would have used the Consumer Price Index (CPI), the traditional measure of inflation, the GDP would have come in at negative .4%, which shows a shrinking economy.  Can you say recession?

It gets even crazier in the second quarter of 2008.  While the Department of Labor reported inflation (CPI) increased by 1%, the Department of Commerce reported inflation (the deflator) decreased by 1.4%.

Using the deflator, The Department of Commerce reported the GDP was up 3.3% for the second quarter.  If Commerce would have used the CPI to account for inflation, the GDP would have been negative .5%.  This would confirm the classic definition of a recession – two consecutive quarters of declining GDP.

The bottom line — our economy is not growing it is getting smaller.

So if it feels like we are in a recession, we are.  Department of Commerce has a magic number, the deflator.  It can use it to make the economy look like it is growing, but we all know better.