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Strange things are afoot with GDP

Posted By Barry Ritholtz On June 30, 2005 @ 7:31 am In Economy,Real Estate | Comments Disabled

Naaf741_economy06292005200926I do not want to become a "nattering nabob of negativity," but I cannot shake the idea that yesterday’s GDP numbers had a certain odor about them.

Maybe I’m just an economic curmudgeon.

Perhaps I am too "reality-based" in my perspective.

I simply cannot compromise my belief in hard data (versus hedonics and seasonal adjustments and/or revisions).

Nor can I manage the suspension of disbelief so common amongst the economic cheerleading crowd, both in the private sector, at the Fed, and amongst the elected and appointed government officials.

Look, I understand that a certain degree of economic positivity is required — for consumer confidence, as well as to prevent the gold bugs and survivialist crowd from scaring everyone into the bomb shelter. I have no desire to cross over to the tinfoil hat wearing fraternity. I accept the necessity of some measure of ‘happy’ bias in the government models.

But at what point do we cross the line from maintaining a healthy optimistic outlook to cynically manipulating data in boldfaced contradiction of reality?

Unfortunately, I think that line was crossed in yesterday’s revised GDP data:

GDP Components:   
Q1 Final (Est 3)    Q1 Prelm(est 2)   Q1 Adv(est 1)]

Real GDP                  
+3.8%                +3.5%                   +3.1%      

Here’s the thing:  Within GDP data, the revision of the Residential Housing is simply too hard to believe: This is data that’s widely available from the NAR amongst others. To get there, you need a significant DROP in home prices. That’s right, a drop in home prices. The revision from +8.8% to +11.5% is simply enormous. I cannot say for sure that its unprecedented — but I cannot recall it being this huge in recent memory.

I am not the only one: The (subscription only) MNSI specifically observed:

The Commerce Department said exports and
investment in residential structures were revised higher in Q1 . . .The structures revision
was due to downward revision to the one-family house price index which resulted
in more real sales and less inflation
an almost unbelievable result given
that the housing market is on fire with home prices posting double-digit
appreciation on the year in some areas.
(emphasis added)

Yesterday’s upwardly revised GDP data is believable only if you accepty the premise that HOME PRICES WENT DOWN IN Q1 2005.

Otherwise, the data was gamed.

Follow the bouncing ball:  The revisions to GDP inflation accounted for virtually all the net positive
revisions to growth

How? The GDP implicit price deflator. For the quarter, it was was revised downward from 3.16% to 2.89% (a drop of 0.27%). That accomplishes a neat little trick: By (artificially) reducing the rate of inflation, the BEA spikes real GDP growth by the same amount, and total GDP growth revised upward from 3.48% to 3.76% (rounded up to 3.8%), an increase of 0.28%.

The deflator was revised downward from an annualized 3.3% to 1.1%, an astonishing drop of 2.2%, and real housing growth revised from 8.8% to 11.5%, an incease of 2.7%. 

Yet year-over-year housing inflation in the GDP is at just 5.2%. Cranking that number up to reality raises inflation, lowers GDP, and spoils everyone’s party.

Forget taking the punchbowl away, this crowd is spiking it with LSD.

Its not like I do not admit when I am wrong [1]. Hell, I expect to be wrong [2].

But this is beyond the pale.

GDP numbers, IMHO, have now entered the realm of Santa Claus, the Easter Bunny, and honest politicians. They are all fictional characters.

(I hope to have some more on this later)


NAR Data on Home Sales Q1 [3]

First-Quarter GDP Is Revised Upward on Housing Surge [4]
DOW JONES NEWSWIRES, June 30, 2005; Page A2

ANALYSIS: US Q1 GDP Rev +3.8%: Prices Dn, Expts & Res Inv
By Joseph Plocek

Market News Service International
Wednesday, June 29, 2005 8:31:18 AM (GMT-04:00)

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/06/strange-things-are-afoot-with-gdp/

URLs in this post:

[1] when I am wrong: http://bigpicture.typepad.com/comments/2005/05/_line_is_the_sa.html

[2] expect to be wrong: http://www.thestreet.com/comment/barryritholtz/10215965.html

[3] NAR Data on Home Sales Q1: http://www.realtor.org/Research.nsf/files/REL0505EHS.XLS/$FILE/REL0505EHS.XLS

[4] First-Quarter GDP Is Revised Upward on Housing Surge: http://online.wsj.com/article/0,,SB112004797007972800,00.html

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