Fuzzier Than Ever - The Latest GDP Report

No one does a better job of dissecting misleading government economic data than Chris Martenson. In his report below, Chris tells us why we can’t rely on recent government data that suggests we’ve reached the bottom of the current recession. As we’ve seen with many past economic reports – the government is ‘spinning’ data so that it appears positive – when the actual data tells us something else.

It’s very easy to see how people can be deceived into buying into the stock market. If you only rely on our government and mainstream media for economic data and don’t examine the actual data yourself – you’re going to be seriously misled. It is a travesty that our political and financial leaders are doing this to the American people.

My hope is that we all wake-up – and these ‘leaders’ are held accountable for their actions.
If you want to learn more about how our government manipulates economic data – I suggest you watch Chris Martenson’s ‘Crash Course’. Here’s the link to the ‘fuzzy numbers’ video of the Crash Course.

http://www.chrismartenson.com/crashcourse/chapter-16-fuzzy-numbers

John – May 2, 2009

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Fuzzier Than Ever - The Latest GDP Report
Thursday, April 30, 2009, 9:17 am, by cmartenson
Executive Summary

• GDP report for 1Q2009 is a mess of Fuzzy Numbers
• The surprising 2.2% increase in PCE, or Personal Consumption Expenditures, is discussed
• Ostensible signs suggest that the bottom is in, but the numbers do not line up at all with hard, factual data
• Sales tax receipts declined in first quarter
• The GDP report for the first quarter of 2009 is in serious conflict with actual state sales tax data
• Vehicle sales are down nearly twice as much as the 19% claimed by the BEA
• The extent to which investors are fooled by these government reports is the extent to which they risk losing a lot of money in the stock market
• Trust yourself

As attendees of my seminars and regular readers know, I am deeply critical of the cheerleading spin cycle that exists between the government and the media, because it often inappropriately mixes facts, opinions, and beliefs. The aim, it would appear, is to foster optimism or confidence in the average investor.

Of course, as chronicled here many times, Wall Street lives off of the fees and products that it sells to retail investors, while the political machine favors a pacified, if not buoyant, electorate. Both of these aims are served by constantly spinning things to the upside.
While it is possible that "investors" are indeed optimistic, focusing on the "slightly more upbeat" report from the Fed and "signs that consumer spending rebounded," these claims deserve a bit of exploration.

GDP Report for 1Q 2009

This morning (Thursday, April 30), we were treated to this headline and story:

Stocks ready to charge again

LONDON (CNNMoney.com) -- U.S. stocks were set to charge higher Thursday, as economic optimism overshadowed worries that a Chrysler bankruptcy may be near.

Wall Street advanced Wednesday after the Federal Reserve issued a slightly more upbeat economic outlook. Signs that consumer spending rebounded in the first quarter, even as the economy contracted, also boosted optimism.

The GDP report came out on Wednesday and was much worse than expected, coming in at -6.1% where a -4% to -5% decline was expected. Oddly, the stock market was completely unfazed by this news and strutted off for a nice gain on the day. Or maybe not so odd, when one views the massive stock futures buying that suddenly poured into the market shortly after the release of the report. Somebody was buying in quantity, but I seriously doubt it was individual "investors," due to the size of the operation.

As always, the GDP report was a mess of Fuzzy Numbers, and it's not even worth parsing for meaning. But since the spin machine is now using it as proof that "consumer spending [has] rebounded," I feel obligated to dive in.

The spin cycle ran with a surprising 2.2% increase in PCE, or Personal Consumption Expenditures, the largest measure of consumer spending, which accounts for more than 70% of the economy. A rebound here could be a sign that the bottom is in, and that's how it was used, heavily, by the Wall Street spin-cycle apparatus. This is perfectly exemplified by a recent NY Times article (April 29) that stated (emphasis mine):

The American economy is contracting at its steepest pace in 50 years, the government reported Wednesday, but an unanticipated rise in consumer spending since January suggested to many economists that the worst of the recession might have passed.

Consumer spending stood out as the only significant bright spot in the Commerce Department's otherwise bleak update... Most of the spending was on autos, kitchen appliances, computers and other durable goods.

The problem is that this reported increase in spending, which was "unanticipated" and a "bright spot", does not line up at all with any other hard, factual data that exists.

GDP in conflict with state sales tax data

To begin with, all 50 states reported large (and usually record breaking) declines in sales tax receipts in the first quarter. With the exception of food, which is largely exempted, nearly every other category of PCE spending is subject to state sales tax collection.
Here's a relevant article:

Sales tax receipts make up one of the best indicators of how a consumer-driven economy is faring. We're not faring well. And sales tax receipts are the primary source, outpacing income tax, for the majority of state budgets. Based on the numbers you're about to read, you can easily understand why so many state budgets are all but teetering in the wind.

Nationally, sales tax receipts were at their lowest in 50 years, down a whopping 6.1% in Q4 2008 compared to the same quarter in 2007, according to the Nelson A. Rockefeller Institute of Government, with 41 states sustaining lower receipts in this same quarter.

And the early numbers on Q1 2009 look even worse.

This raises a troubling question: How did the federal government record a tidy 2.2% INCREASE in consumer spending, while states experienced record-breaking drops in sales tax receipts?

The chart below (see State Sales Tax chart at begining of post) was generated by a firm that specializes in tracking and projecting state sales taxes. The projection for Q1, which had January data fully in place, was for a 12% decline in state sales tax revenue. Unless this firm made the biggest goof ever, or there was a fantastic rebound in purchasing in February and March, a gigantic gap exists between the federal government's 2.2% increase in PCE and this sales tax data.

Looking at the raw data for California, which represents more than one-eighth of the entire US economy, we see that their first quarter results matched the estimate in the chart above by logging a 10.8% decline during the first quarter of 2009.

[First quarter 2009] collections for the three major taxes were down $6.1 billion (-10.2%) from last year at this time. Retail sales [taxes] were down $2.1 billion (-10.8%), personal income taxes fell by $3.5 billion (10.5%), and corporate taxes were $472 million lower (-7.3%) than last year's total at the end of March.

So here's a serious question: How is it possible for states to record a more than 10% decline in sales tax collection, while the federal government reports a 2.2% gain in personal consumption expenditures? This is no small matter – this is the largest such gap that I can find in the records.
At times like this, I would strongly caution you to remember that state sales taxes are simply collected and added up, while the GDP report is subject to all manner of politically-motivated adjustments and manipulations.

Bottom line: The GDP report for the first quarter of 2009, showing an increase in PCE of 2.2%, is in serious conflict with actual state sales tax data.

GDP in conflict with auto sales data

Once we dig into the miraculous 2.2% PCE gain, we find that it consists of a $43.7 billion gain over the prior quarter and that more than half of that gain was due to an increase in durables good purchases by consumers. Wait, what?

Durables can be categorized into two big buckets, cars and household furnishings. Both recorded gains. Wait, what? How can that be? Have we not been inundated with the most stunning declines in auto sales in history?

Let's peer in a little deeper.

Sure enough, the Bureau of Economic Analysis GDP report shows that autos were sold at an annualized rate of $350.6 billion in 1Q09 which was a nice $16 billion gain over the prior quarter. Further the BEA reported that auto sales were down some 19% from the same quarter a year prior (see Chris' table at the beginning of this post: GDP-Durable Goods).

However, this information, too, is in dire conflict with hard, verifiable, real world facts. In reality, vehicle sales are down nearly TWICE as much as the 19% claimed by the BEA, at least if one counts vehicles that were, you know, actually sold (table at beginning of post).

Vehicle sales are off more than 38%. But that's not all. Given the levels of discounting involved this year compared to last, the dollar value of these sales should have been off more than 38%. Instead, the BEA has reported that motor vehicles and parts are only down 19% yr/yr.

If we assume that the reported auto sales numbers represent reality, we can estimate that, instead of motor vehicle sales adding $16 billion to PCE, they subtracted something on the order of $50 billion to $80 billion. Where a 2.2% gain in PCE was reported, based on vehicle sales alone we might estimate that a 2-4% decline occurred.

Bottom line: The GDP report tells a tale of advancing auto sales that is in dire conflict with real-world data.

Conclusion

Real-world data, consisting of simple collections and summations of taxes collected and vehicles sold, tells a starkly different tale from the sampled, adjusted, and otherwise manipulated data being reported by the federal government. The degree of separation between real-world data and reported numbers is the largest I've ever observed, leading to the conclusion that the use of Fuzzy Numbers is now worse than ever.

The extent to which investors are fooled by these government reports is the extent to which they risk losing a lot of money in the stock market.

While I understand the political desire to create a sense of optimism, the practice of fibbing to ourselves by our official numbers is abhorrent and is simply a continuation of the failed practices that led us into this crisis in the first place. We are doing ourselves no favors by continuing the practice of manufacturing fraudulent and misleading data simply for the purpose of attempting to make things appear better than they really are.

We overspent as a nation, and now it is time to live within our means. Do not be fooled by these so-called "glimmers of hope" – they are false.

Stay the course, and trust yourself to know what's right.

Is the Recession Really Over? More GDP Games........

U.S. 3rd Quarter GDP data was released today.

Here’s the headline and an excerpt from the Wall Street Journal:

‘GDP Data Suggest Recession is Over’

The economy expanded in the third quarter after shrinking for four consecutive quarters, likely marking an end to the worst recession since World War II. But the recovery is expected to be slow, as the economy continues to fight rising unemployment and a persistent credit crunch.


Gross domestic product rose by a higher-than-expected seasonally adjusted 3.5% annual rate July through September, the Commerce Department said Thursday in its first estimate of third-quarter GDP. Economists surveyed by Dow Jones Newswires had forecast 3.2% GDP growth during the summer. GDP is the broad measure of economic activity in the U.S.


President Barack Obama said new data showing that the U.S. economy grew in the third quarter is "an affirmation that this recession is abating and the steps we've taken have made a difference."


"This is obviously welcome news," Mr. Obama said in remarks prepared for delivery at the White House. "But I also know that we have a long way to go to fully restore our economy, and recover from what has been the longest and deepest downturn since The Great Depression."

So – we see President Obama and others (including Timothy Geithner) saying that the recession is slowing considerably – maybe even ending.

Is this true?

No.

Let’s let Karl Denninger explain the truth behind the GDP number.

jg – October 29, 2009
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GDP is ……Better Than Expected?

The Market Ticker

(http://market-ticker.denninger.net/archives/1550-GDP-Is.....-Better-Than-Expected.html)

Thursday, October 29. 2009

Posted by Karl Denninger in Macro Economics at 08:59

Oh what a tangled web we weave....

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.5 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent.

Looks good, right?

Hmmmm.... or is it?

Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change.

Real federal government consumption expenditures and gross investment increased 7.9 percent in the third quarter, compared with an increase of 11.4 percent in the second.

Ok, from this we can compute a few things.

3.5 - 1.66 - (7.9 * 30%) = -0.53%

Now let's adjust for inventories:

The change in real private inventories added 0.94 percentage point to the third-quarter change in real GDP after subtracting 1.42 percentage points from the second-quarter change.

-0.53% - 0.94% = -1.47%.

Ok, that's bad but not catastrophic and is an actual improvement compared to the second quarter. But....

Current-dollar personal income decreased $15.5 billion (0.5 percent) in the third quarter, in contrast to an increase of $19.1 billion (0.6 percent) in the second.

Personal current taxes increased $4.8 billion in the third quarter, in contrast to a decrease of $119.1 billion in the second.

Eeeeehhh... those are both going the wrong way. Taxes up, income down. And...

Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent) in the second. Real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent.

That's worse. A lot worse. Disposable personal income decreased in nominal terms q/o/q by 5.9% while in real terms (inflation adjusted) it decreased q/o/q by 7.4%! That is an enormous swing in purchasing power and not in the right direction!

Personal outlays increased $148.2 billion (5.8 percent) in the third quarter, compared with an increase of $8.2 billion (0.3 percent) in the second. Personal saving -- disposable personal income less personal outlays -- was $364.6 billion in the third quarter, compared with $533.1 billion in the second.

The personal saving rate -- saving as a percentage of disposable personal income -- was 3.3 percent in the third quarter, compared with 4.9 percent in the second.

So into decreasing personal income and disposable personal income people tried to spend anyway. Best guess: most of this was "cash for clunkers", which is the worst sort of "spending" - it is the taking on of more debt by replacing a paid-off car with one that now comes with a shiny (and nasty) payment book. The Trade: Go long auto repo outfits (aside: as far as I know there are no publicly-traded repo companies.)

Nothing in here I like; to the contrary, this report sucks and on a drill-down appears to be full of outright lies.

Looking inside the data, the "big change" in private domestic investment is all residential fixed - up 23.4%. I don't believe it. I've been scouring the homebuilder earnings releases and data, and I don't see the numbers that support this. An improvement over the ditch-diving of the last many quarters, yes - but a 23.4% increase, a swing of fifty percent from Q2-Q3? Oh hell no. Where is it? It's not in Home Depot's or Lowe's quarterly results, it's not in the homebuilders, and I can't find it in the suppliers (lumber companies, etc) either. This sort of move would result in monstrous top-line revenue increases reported by firms in this sector and that simply has not happened.

Nor do the export and import numbers look right. Port of Long Beach and LA anyone? Those numbers also don't add up - swings of 20-25% in one quarter? Not reflected in container volumes and freight loadings. Yet it has to be - how do you get something in or out of here without it going through a port?

Government looks right, both federal and state/local. The "Obama will cut defense and war spending" folks have to be bashing themselves with a hammer - there's no evidence for that in the data, now three quarters into his administration. If you're anti-war and "bring the troops home", you may want to re-think whether voting for Barry was a wise decision - he sure as hell hasn't kept that promise. (Note that I didn't think he would either but that lie sure played well in San Francisco, didn't it?)

Forward the big problem is the deterioration in personal income. You can't spend what you don't have without credit creation, and that's fallen off a cliff. The Fed's credit reports continue to come in with huge contractions - this should not surprise, as demanding that banks lend to people who are seeing their income shrink is into the realm of pure idiocy.

The market likes the numbers although a lot of the move - perhaps all of it - is Bucky getting thrown under the bus once again.

You can't expect the cheerleaders on CNBC to read beyond the headline numbers, and they (once again) did not disappoint in this regard. The first 20 minutes of "analysis" brought not one mention of the decease in personal income or disposable personal income, yet on a forward basis this is in fact the most important piece of information in the report.

You cannot have an economic recovery when on a q/o/q basis real disposable income is contracting at a 7.4% annual rate and worse, the spread between nominal and real income is widening, indicating that mandatory purchases such a food, energy and health care - are increasing.

Consumer Spending Tumbles

We’re hearing a lot of people today tell us that the ‘great recession’ is either over – or will be ending soon. We’re hearing this from political leaders, financial leaders and economists. Many of these people are now pointing to the 3rd quarter increase in GDP (3.5%) released yesterday. As we discussed in yesterday’s post – no one should be celebrating this gain in GDP.

The problem – as we’ve seen time and again – is that very few people are analyzing the details behind the 3.5% gain - and are therefore blindly following the blind.

What is the real economy? Does the GDP number really give us a good indication of what is going on? I believe the answer is no. The real economy to ordinary people (that’s you and me) is employment, consumer & business spending, wages/income & our purchasing power (U.S. Dollar). I don’t know about you – but if I’m out of a job – I could care less what the government says about GDP (whether the actual number is accurate or not). If I don’t have a job – I’m not spending – I’m just trying to survive.

This is what 26 million of us are now doing – just trying to survive.

Because real unemployment is somewhere between 16-22% (depending on how you measure) – it should not surprise anyone that consumer spending is declining.

From the Wall St. Journal:

Spending Tumbles

Spending by Americans took a big tumble in September, as they lost a popular government subsidy and were left with a lousy job market and a credit crunch.

The 0.5% drop in spending was the largest since December 2008, when the recession was at its worst. Most of the drop was in durable goods, which include autos. Outlays on nondurable goods and services posted a gain from last month.

We’ve seen massive amounts of ‘stimulus’ money flowing into our financial system – but little of this is making its way to ordinary Americans. Since our monetary system is based on debt – let’s look at what banks are doing with their reserves.

Are they lending? No. Why? As I’ve said before – banks do not want to lend in this economic environment and as our economy continues to lose jobs – there will be fewer and fewer people and businesses who can qualify for loans.

Since we now know that bank loans directly contribute to our money supply – we would expect our money supply growth to slow considerably based on the charts above – and that’s exactly what we’re seeing.

Personal income is also flat or down.

With nearly 10% of the U.S. labor force out of work, incomes aren't going up much. September's flat reading followed a 0.1% August gain, revised from an originally reported 0.2% increase.

So – in the real economy where you and I get the money we need to survive – life is not good and the trends are not good. All of the people out there saying that the recession is ending are living in a fantasy land of government statistics and wishful ‘outlooks’.

For you and me – economic conditions continue to decline. As you’ve seen me say before – we’re rapidly approaching a cliff – and we’re going to be pushed off at some point.

Get ready for significant stock market declines in the near future. Economic fundamentals do not support current stock prices. When everyone wakes up to this economic reality – life in the stock market is going to be chaotic.

I have posted another good blog post by Karl Denninger below relating to the consumer spending report – followed by the Wall St. Journal article mentioned above.

jg – October 30, 2009
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Friday, October 30. 2009

Posted by Karl Denninger in Macro Economics at 09:05

Another Bad Economic Report (PCI/Spend)

http://market-ticker.denninger.net/archives/1557-Another-Bad-Economic-Report-PCISpend.html

How do you get "economic recovery" out of these numbers?

Personal income decreased $0.1 billion, or less than 0.1 percent, and disposable personal income (DPI) decreased $0.2 billion, or less than 0.1 percent, in September, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $47.2 billion, or 0.5 percent.

That looks like flat income and down spending to me.

Oh wait - we have to read past the first two sentences, right?

Let's do that.

Private wage and salary disbursements decreased $11.2 billion in September, in contrast to an increase of $10.1 billion in August. Goods-producing industries' payrolls decreased $7.8 billion, compared with a decrease of $6.3 billion; manufacturing payrolls decreased $1.5 billion, compared with a decrease of $4.1 billion. Services-producing industries' payrolls decreased $3.4 billion, in contrast to an increase of $16.4 billion.

Wait a minute. I thought that income was flat? We have a decrease, a decrease, a decrease and a decrease. How do we get to flat with those?

Supplements to wages and salaries increased $0.1 billion in September, compared with an increase of $2.0 billion in August.


Proprietors' income increased $0.7 billion in September, compared with an increase of $3.4 billion in August. Farm proprietors' income decreased $1.6 billion, compared with a decrease of $1.2 billion. Nonfarm proprietors' income increased $2.3 billion, compared with an increase of $4.6 billion.


Rental income of persons increased $5.4 billion in September, compared with an increase of $5.2 billion in August. Personal income receipts on assets (personal interest income plus personal dividend income) decreased $13.8 billion, the same decrease as in August. Personal current transfer receipts increased $17.3 billion in September, compared with an increase of $9.6 billion in August.

Ah.

Small business income was down compared to August, rental incomes were basically flat (compared to prior month), but income receipts on assets (dividends + interest on assets) decreased. Those are bad comps too.

The big Kahuna was government handouts, which was up big m/o/m. There's the entry that kept PCI and DPI from collapsing.

Real PCE -- PCE adjusted to remove price changes -- decreased 0.6 percent in September, in contrast to an increase of 1.0 percent in August.

Consumers are not spending.

All in all, another bad report. Not a disaster, but certainly not the stuff of which "economic recovery" is made.

The evidence continues to pile up......

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OCTOBER 30, 2009, 8:58 A.M. ET

Consumer Spending Tumbles

Wall St. Journal

by JEFF BATER

Spending by Americans took a big tumble in September, as they lost a popular government subsidy and were left with a lousy job market and a credit crunch.

The 0.5% drop in spending was the largest since December 2008, when the recession was at its worst. Most of the drop was in durable goods, which include autos. Outlays on nondurable goods and services posted a gain from last month. Spending rose 1.4% in August, revised up from a previously estimated 1.3% increase. That gain was driven by "cash for clunkers," which let motorists swap gas guzzlers for newer models. The car-rebate program started in July and ended in late August.

The subsidy helped push the economy to what the government reported this week was a 3.5% increase during the third quarter, seen as an end to the recession. But the recovery is expected to be slow, and questions abound to its sustainability once government stimuli fade. Another popular incentive, the first-time homebuyer tax credit, lapses in November, although the housing industry is trying to push an extension through Congress.

Commerce Department data Friday showed personal income flat compared to August while spending last month decreased by 0.5%. A key gauge of prices reiterated inflation wasn't an immediate threat, as the economy fights to recover.

Economists surveyed by Dow Jones Newswires had forecast income held steady during September and spending fell 0.5%.

With nearly 10% of the U.S. labor force out of work, incomes aren't going up much. September's flat reading followed a 0.1% August gain, revised from an originally reported 0.2% increase.

Personal saving as a percentage of disposable personal income was 3.3%, compared to 2.8% in August.

As for price gauges in Friday's report, the price index for personal consumption expenditures excluding food and energy, year over year, rose 1.3%. The year-over-year gain in August was also 1.3%. The Federal Reserve watches this core PCE index closely for signs of inflation pressures. Fed officials define their statutory goal of price stability as inflation of 1.5% to 2%.

On a monthly basis, the core PCE increased 0.1% in September compared to August. It has climbed at that rate five months in a row.

The PCE price index rose 0.1% in September compared to August. It rose 0.3% in August. Year over year, the PCE price index was down 0.5% in September. It fell at the same rate in August.

Write to Jeff Bater at jeff.bater@dowjones.com