Government Changes GDP Calculation to Hide Recession, 2.3% Growth Bogus

File photo: Shipping-cranes-in move containers at a port in Portland, Oregon. (Photo: REUTERS)

Each time the government changes GDP calculation methods, it alters the data that should in reality show a recession. The Commerce Department said Thursday that U.S. economic growth bounced back in the second quarter to bring gross domestic product (GDP) to a 2.3 percent annual rate.

The report cited strong consumer spending as the offset to the drag from weak business spending on equipment. First-quarter GDP, previously reported to have shrunk at a 0.2 percent pace, was revised up to show it rising at a 0.6 percent rate. The data could bring the Federal Reserve closer to hiking interest rates this year, largely believed to be in September.

Don’t believe it for a second.

In a blog post published in May, which PPD and very few others covered, the Bureau of Economic Analysis announced a number of “alterations” it planned to make in seasonally adjusting data used to calculate economic growth. These changes, which were implemented with the release of the initial second-quarter GDP estimate Thursday, on July 30, were pushed by the San Francisco Federal Reserve Bank to mask a potential recession in light of first-quarter contraction.

They argued the so-called seasonal adjustment is leaving “residual” seasonality, which didn’t factor leftover biases that exist within its current methodology. However, the agency has always adjusted its figures for seasonal variations, as growth in any given first quarter tends to be weaker than in the remaining three. Of course, this is not a new argument, nor was it ever intended to be used to continuously alter how the government calculates GDP.

That is, until the Obama administration.

The revision marks the second time the government has changed the previously long-standing methodology. In July 2013, the U.S. government made a significant change in the gross investment number (I), which now includes research and development (R&D) spending, art, music, film royalties, books and theatre. In the entertainment industry, for instance, much of those numbers are expected projections, such as how much they believe a movie will make at the Box Office.

This change in the method to gauge GDP — or, rewriting the GDP number — was first implemented by the United States, and India was quick to express an interest. Yet, unlike the U.S., India has made a reasonable case for revising their long-plagued methodologies. In the U.S., changing the method to boost investment measures has no real benefit to the truth and no other purpose but to make “GDP growth happy,” as Bloomberg correctly critiqued. Let’s take a look at the government’s claims.

The alleged growth in the second quarter was fueled by Americans reversing their savings rate trend. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, supposedly grew at a 2.9 percent rate from a downwardly revised 1.8 percent pace in the first quarter. Consumer spending was previously reported to have increased at a 2.1 percent rate at the start of the year.

So how is GDP really calculated?

GDP = private consumption + gross investment + government spending + (exports − imports), or

GDP = C + I + G + (X – M)

Yet, despite the government’s rosy outlook, surveys on consumer spending and sentiment leading up to the report simply do not comport with their claims. Thomson Reuters and the University of Michigan said their gauge on consumer sentiment fell in July to 93.3 from a June reading of 96.1. Wall Street expected the gauge to at least hold steady.

The privately run Consumer Conference Board said their gauge found Americans are less optimistic about current and future job growth in June, falling to its lowest level since September 2014. The index of consumer confidence plunged to 90.9 in July from a revised 99.8 in June, which was initially reported at 101.4.

According to a July report, U.S. retail sales fell in June as Americans broadly cut back on purchases of automobiles and other goods. The report, taken along with trade data to be discussed momentarily, was a clear indicator the economy is slowing again. Retail sales, which were expected to rise by 0.2 percent, fell by 0.3 percent and was the weakest reading since February. Further, retail sales for the month of May — also broadly weak — were revised down to show a gain of 1.0 percent instead of the initially reported 1.2 percent.

Yet, the new report claimed the savings rate fell to 4.8 percent from 5.2 percent. The personal consumption expenditures price index increased to 2.2 percent after falling at a 1.9 percent rate in the first quarter, the fastest since the first quarter of 2012. Excluding food and energy, prices increased at a 1.8 percent pace. Statistically speaking, it doesn’t get any more believable if we go back two or three months. Nevertheless, here are some more tidbits the government is claiming in the new GDP report.

Despite a strong dollar, exports allegedly rebounded in the second quarter while imports increased more than expected, resulting in a smaller trade deficit that added 0.13 percentage point to GDP growth. This is highly suspect, as U.S. import prices unexpectedly fell in June by 0.1 percent, marking yet another decline during 11 of the previous 12 months. Import prices in May were also downwardly revised to just a 1.2 percent increase.

Further, if domestic demand was as strong as the report claimed, and imports truly did increase, then much of those sales for mentioned manufactured goods would’ve presented some indication in the preceding surveys. But the Philadelphia Federal Reserve reported its Manufacturing Business Outlook Survey fell from 15.2 to 5.7 in July, with employment contracting to -0.4. The reading on new orders slipped to 7.1 in July from the June reading of 15.2. The New York Federal Reserve’s Empire State Manufacturing Survey did increase 6 points to 3.86 in July, up from -1.98 in June, but the new orders index was little changed at -3.5, a sign that orders continued to decline. Further, the shipments index fell four points to 7.9.

While the National Association of Realtors and the government report both tout existing home sales, which were recently reported to be at the highest level since 2007, other data suggest the housing market could not have been the offsetting source of strength in GDP. Juxtaposed to existing home sales, which the National Mortgage Risk Index suggests are being fueled by risky lending practices, new home sales tumbled by 6.8 percent in June from the prior month to 482,000, the lowest reading since November.

The S&P/Case Shiller composite index of 20 metropolitan areas found U.S. single-family home prices rose less than the median economist forecast had expected in May. David Blitzer, chairman of the index committee at S&P Dow Jones Indices, cited first-time homebuyers as “the weak spot” behind the price plateau. It is true the Commerce Department said housing starts surged to a near 8-year high in June to a seasonally adjusted annual pace of 1.17 million units, but the NAHB/Wells Fargo Housing Market index said homebuilder sentiment was sideways. The report issued a stern warning regarding higher interest rates.

According to a new CNN/Opinion Research Poll, nearly 60 percent of Americans say the economy is in “poor” condition. Apparently, Americans aren’t on the same page as the government as to how they see the state of the economy. Perhaps that is because the government keeps changing the text on the page?