THE BASIS POINT

Preview of Friday’s first read on 3Q GDP

This most significant fundamental this week will be Friday’s 3rdQ2012 GDP.  As of late, this initial  GDP has been subject to significant revision.  Most of the GDP components have only 2 months of data and one month of estimate.  This time the effect of not knowing what, for example, imports and exports were during the quarter, is magnified by the volatility of commodity prices. More troubling is the fact that BEA does not use any standard (CPI or PPI) adjustment for inflation but instead makes up its own deflator with no explanation whence it came.  This is significant because the last two quarters of GDP would have been higher if BEA used CPI-U instated of its own deflator.

BEA’s first estimate of 1stQ2008 GDP (the start of The Great Recession) was + 1.0%.  It has now been adjusted to -1.8%.  This is not the sort a performance conducive to an understanding of what is happening and the ability to frame fiscal and monetary policy to deal with it.

GDP for 2ndQ2012 was revised down to +1.2% which will have the effect of making whatever number appears as GDP looking relatively better that it otherwise would have. 

The important point is that BEA does a very poor job of calculating GDP.  So much so that it continues to publish revisions for up to 5 years. It may prove the case that this Friday’s number has more political value than macroeconomic value.

 

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