3 Things: GDP – A Grossly Defective Product

“Yet despite its theoretical charm, GDP is used, a fallible measure – and becoming increasingly one that could be described as a grossly defective product. To begin with, the quantity shifts as more complete, up-to-date data become available. He is absolutely correct. You can find inherent problems when you begin to adapt the “math” to “goal seek” a specific outcome. For example, the problem with adding “intellectual property” is that the cost of a new malignancy drug treatment, a Hollywood movie or a fresh strike melody is roofed in the worthiness of product taken to market already.

In other words, since creation is exactly what drives economic growth, that value is captured in the quarterly evaluation of business investment, spending, etc. Furthermore, how exactly does the BEA value “intellectual property” accurately and pretty across all industries and products? Some products like a cancer treatment have a much different “value” than a song.

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However, since those tweaks didn’t boost the economic growth rate just as much as was hoped, the BEA went further in 2015 to modify the calculation once again. “Nicole Mayerhauser, chief of BEA’s national wealth and income division, which oversee the GDP report, said in the statement that the agency has recognized several resources of trouble in the data, including federal defense service spending. Mayerhauser said initial research shows this category of spending to be generally reduced the first and the fourth quarters. The BEA may also be adjusting “certain inventory investment series” that have not previously been seasonally modified. I am not just a conspiracy theorist by any stretch.

However, something strikes me as very odd about the regularity of adjusting the calculation to acquire better outcomes. The Federal Reserve understands, year of the current financial expansion as we push into the eighth, that we are likely closer to another recession than not. The problem is the Fed has remained trapped at the zero bound for rates of interest for far too long. While QE programs have NOT been able to create organic, financial growth, they were effective at boosting asset prices and providing an illusory wealth effect. This might have provided cover for the Federal Reserve to raise interest rates from the zero bound providing them with access to a more effective monetary policy tool in the future.

The chart below shows the trajectory of the rate escalates the Fed should have performed given the support the enlargement of their balance sheet would have provided. Obviously, the offset of using the liquidity push to improve rates and normalization of monetary policy in early stages could have limited asset-price inflation to about one-half of its earlier advance. Certainly not nearly as much fun for Wall Street. But alas, the Fed failed to use the adjusted and recalculated economic numbers, massive liquidity flows, and rising asset prices to reload their policy tools. After two years of promises to hike rates in the real face of stronger financial growth, each attempt has been consistently met with “weaker than expected” economic data.

As we approach the finish of the entire year, the Fed is again determined to raise interest rates once. However, is financial growth strengthening enough to support the hike? We can take a look at some choice methods of the economy to answer that relevant question. As the BEA is suggesting that it’s simply “residual adjustments” lingering in the inventory and production-related data, that does not really explain the financial weakness in other areas of the economy.