On Wednesday the government reported that the GDP growth was an impressive 3.9%. Then today the Labor Department reported the economy added 166,000 new jobs, twice as much as expected.
Everything is coming up roses for the economy.
Or is it?
If you keep reading the article you run across this little tidbit:
In contrast to the payrolls figures, a separate household survey showed a loss of jobs. The unemployment rate held steady because about 200,000 people left the workforce.
That's curiously suspicious because 340,000 people left the labor force in August.
The number of people who dropped out of the labor force increased by 344,000 in September as well. I understand the "going back to school thing" for students, but does it take three months to go back to school?
If you keep studying the numbers you'll find that employment in real estate (+2,800) and commercial banking (+1,500) are up.
How is that possible during an epic housing bust? It's done through the magic of the Birth/Death Model. The Birth/Death Model is a statistical model designed to capture job growth from new businesses (birth) that the job surveys miss.
In other words, the Labor Department can't actually prove these jobs exist, they just assume they do based on the employment situation of a year ago when the model was created. And what did the model say happened during the past month? It said that new financial service companies added 25,000 new jobs during the past month despite a worldwide credit crunch and housing bust. Yippee!
Maybe those new financial service jobs were in the repo business, which does indeed appear to be booming.
Watch as I pull an economic statistic out of my ass
But the real trick wasn't the job numbers, it was the GDP number. That's where the alchemists working on the government's economic numbers displayed their magic.
To arrive at this rate, the government had to assume that inflation during the quarter ran at an annualized rate of .8%. That is the lowest rate of inflation used to calculate U.S. GDP since the Eisenhower administration. With oil priced at almost $100 per barrel, gold futures trading over $800 per ounce, the dollar hitting record lows, and the Fed printing money like it is going out of style, the government has the nerve to claim that current inflation is the lowest it has been in half a century. Unbelievable!
Just in case there is some confusion, the government adjusts nominal GDP gains using the GDP deflator, which represents the inflation rate during the time period being measured. This is done to strip inflation out of the GDP calculation so that only real growth gets counted: not nominal gains that result purely from inflation.
The consensus estimate for 3rd quarter GDP growth was 3.4%. The reason we beat that number was that the government adjusted the nominal 4.7% gain by a mere .8%. Had the government assumed a higher rate of inflation, say 2.6% (identical to the rate used to deflate second quarter GDP,) the 3rd quarter gain would have been only 2.1%, well shy of the consensus forecast.
Back in the real world, inflation is running a good deal more than 0.8%. Every time I go to the grocery store or fill up my gas tank I notice how inflation is a great deal more than 1% a year. But how much is it actually running at? Fortunately there are other measures of inflation than what the government puts out.
The latest Economist magazine puts the year-over-year dollar index of "all items" up 16.7%. They put the price of food up 31.6% year-over-years. So our government tells us that "core inflation" is running below 1%. And people take these figures seriously.
So if you used the annualized Economist numbers (that reflect the real world) rather than the government's inflation numbers (that reflect neo-con fantasy land) then the GDP growth for the last question would have been -12% annualized.
To put it simply, the economy is in a deep recession.
Slight of Hand
So how does the Bush Administration hide a recession in plain site?
Here's a quick primer on the hidden art of economic magic. For instance:
Up until the Clinton administration, a discouraged worker was one who was willing, able and ready to work but had given up looking because there were no jobs to be had. The Clinton administration dismissed to the non-reporting netherworld about five million discouraged workers who had been so categorized for more than a year.
The Clinton administration also reduced monthly household sampling from 60,000 to about 50,000, eliminating significant surveying in the inner cities. Despite claims of corrective statistical adjustments, reported unemployment among people of color declined sharply, and the piggybacked poverty survey showed a remarkable reversal in decades of worsening poverty trends.
But this didn't start with Bush, or with Clinton. The first major change in inflation reporting was with the Reagan Administration in 1983.
Before 1983, CPI measured housing inflation by looking at what it actually cost to own a home: house prices, mortgage rates, property taxes, even maintenance. After 1983, BLS changed the housing component, using the concept of "owner's equivalent rent." It's a measure of what homeowners could get for their homes if they rented them. It accounts for 23% of the overall CPI and about 30% of core prices, according to BLS.
Since the housing market began soaring, rental properties have languished. Vacancy rates rose, and rents came down in price. This had the surreal effect of pushing CPI measures down. At exactly the time housing became extremely expensive, the BLS measure of this component made inflation appear to be going lower.
On top of that, the BLS removes the value of any landlord-provided utilities in its calculation of owner's equivalent rent.
But the inflation numbers fun doesn't stop there. Under the Clinton Administration the BLS stopped measuring a basket of goods and started substituting. For instance, when the price of steak rose they would substitute hamburger. Cost of living was replaced with cost of survival. It was called hedonics. I assume that when the price of hamburger rises they will substitute dog food.
They then decided to change a straight arithmetic weighting of the CPI components to a geometric one. In other words, the price of goods that are rising will be given less weight in the CPI than the price of goods that are falling.
Once the system had been shifted fully to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology. The results have been dramatic. The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by a total of 30%.
But that wasn't good enough for the federal government. In 1996 they shifted from a fixed-weighted to a chain-weighted basis. This increased the GDP by a further third of a percent.
There are also other ways of understating inflation, such as health insurance.
Health insurance represents only expenditures by consumers for premiums -- employers contributions are, of course, not included.
[Update: I just spotted this article.]
As odd as it sounds, the government reported that inflation was at a four-decade low in the third quarter, primarily because import oil prices rose so much.
If you don't understand that, welcome to the confusing world of national income accounting, where up sometimes is down, and where sometimes one plus one can equal zero.
The simple explantion:
Because of the way the government counts and reports the numbers, real-life inflation was understated and growth was overstated.
The economy didn't really grow 3.9%, and inflation really wasn't 0.8%. The numbers aren't as good as they look.
And then there are the numbers that simply vanish into thin air.
Subtracting the value of American international assets from what foreigners own of American assets, they come up with how much Americans are in debt to other nations and their peoples.
But if you look at the current account of the US balance of payments, which measures primarily the balance of trade, and also flows of interest and dividends, foreign aid, and other international transfers, the US should be far deeper in hock – $2.9 trillion more over the years from 1990 through 2006 than the official $2.6 trillion.
So what does all this mean to you and me? No one can fortell what the future holds, but we can make a few guesses.