GDP Revisions

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GDP revisions are coming out on July 31st right in the middle of Q2 earnings reports and before many banks get to report. These revisions could be significant according to Merrill Lynch economist David Rosenberg.

As the revisions come during earning reporting season, they will set the tone for the banks’ earnings reports in August.

I found last year’s GDP reports in particular somewhat suspect. See my entry entitle “The revised GDP number: pure fiction.” Basically, I do not believe that the real GDP as reported reflected the actual growth of the economy over the past year because the GDP deflator was so low. I measured the final GDP quarterly deflator to be 2.64% in Q2 2007, 1.04% in Q3 2007, 2.44% in Q4 2007 and 2.69% in Q1 2008 on an annualized basis. For that year period through March, the GDP deflator was 2.20%.

If one looks at the most common inflation gauge, CPI — which itself understates inflation because of hedonics, geometric weighting, substitution effect, and a bunch of other anomalies — inflation ws much higher. In Q2 2007 it was 4.26%, in Q3 2007 2.46%, in Q4 2007 6.22% and in Q1 2008 3.10%. For that year period through March, the CPI was 4.00%.

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So, how is it that official inflation statistics as measured by our government was 4.00% and the GDP deflator was merely 2.20%? That’s a huge difference. Nominal GDP grew 4.79% over that year period. Using one inflation metric, GDP barely grew using another it looks fairly robust.

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But, never fear revisions are here. David Rosenberg believes these revisions will support the case he makes regarding recession – one I share.

The United States remains firmly in an economic recession in spite of economic growth figures to the contrary, a leading economist has warned.

Merrill Lynch’s David Rosenberg, the first economist from a major bank to declare a U.S. recession was underway back in early January, argues that recent unemployment figures show yet more evidence that the U.S. economy is a deep recession.

Pointing to last week’s news that employment has now declined for six months in a row, Mr Rosenberg, Merrill’s chief North American economist, says that “at no time in the past 50 years has this happened without the economy being in an official recession.”

The typical definition of a recession is two consecutive quarters of negative gross domestic product (GDP) growth, something which the U.S. has yet to have.

However he argues that this is only a matter of time, given that all four recession determinants “have peaked and rolled over.”

He points to widespread decline in economic activity, noting that real sales in manufacturing and retail, employment, industrial production, and real personal income – the four determinants – are all way below their peaks.

The Merrill Lynch economist estimates that monthly GDP “peaked in January and has declined at a 2.2pc annual rate since that time,” noting that he believes that the recession started between October and February.

“We expect the real GDP data are going to undergo massive revisions, and in fact, that we are going to be on the receiving end of what could be a significant revision on July 31,” Mr Rosenberg argues, suggesting that these revisions will point to the onset of recession.

The Telegraph, 8 Jul 2008

So mark July 31st on your calendar as the day the government comes clean about the recession.

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