By Alister Bull - Analysis
WASHINGTON (Reuters) - Economic growth doubled in the second quarter, but in case it doesn’t feel like the economy is expanding robustly, blame the deflator.
Just as a temperature gage doesn’t say much about how hot it will feel when you go outside because it doesn’t measure humidity, statistics don’t always capture economic reality for ordinary Americans.
Real gross domestic product is adjusted for inflation. But the rate of inflation used to perform this complicated calculation excludes import prices like the cost of imported oil. This has soared, pushing up gasoline prices and taking a big bite out of U.S. household budgets.
“The concept of ‘real’ GDP is intended to measure physical quantities rather than dollar amounts. So that if you paid a higher dollar price but purchased the same number of physical goods, real GDP would be unchanged,” said professor James Hamilton of the University of California, San Diego.
On this basis, U.S. GDP advanced at a 1.9 percent annualized pace in the second quarter, after adjustment by an inflation rate -- or deflator -- that was calculated at just 1.1 percent, according to U.S. Commerce Department data published on Thursday.
But consumers face much higher prices. The gross domestic purchases price index, which measures what Americans buy and includes import prices while excluding export prices, was measured at a much higher 4.3 percent in the second quarter.
“The difference between those two indexes ... is larger than average and does represent a difference between what the economy is doing strictly measured by GDP and, if you will, what people are spending for goods and services,” said Eugene Seskin, an economist with the Commerce Department’s Bureau of Economic Analysis, which produces the report.
“There is no magic going on, no slight of hand,” he said, deflecting any suggestion that this is a convenient outcome for the U.S. government.
People who think the United States has already slipped into a recession that has been massaged away by the official data were not persuaded.
“That alleged 1.9 percent growth depended on the ludicrous assumption that inflation was just 1.1 percent at an annual rate,” said Stefan Karlsson, an economist based in Sweden.
“If you instead deflate the nominal GDP growth of 3.0 percent with the 4.3 percent increase in the gross domestic purchases deflator, then growth was -1.2 percent,” he wrote on his blog.
Not that there wasn’t something for optimists to be cheerful about in the GDP release. Some saw a big drop in inventories potentially concealing good news.
Inventories fell at an annualized rate of $62.2 billion, the largest decline since the fourth quarter of 2001, and this subtracted 1.9 percent from second quarter GDP growth.
“That was a huge drop in inventories ... and that leaves a lot of room on the other side to say that things are even better than they seem,” said Hamilton.
GDP measures production. Sales made out of inventories subtract from GDP. If this happened because sales were stronger than businesses expected, it is probably good news. But if it happened because firms were running down stocks due to pessimism about future sales, it may be a warning signal.
Reporting by Alister Bull