from our disseminator of 'inconvenient economic truths' Robert Barone via
(snip)"Recent Upbeat Data in the US Is Misleading
GDP
GDP managed to eke out a 1.5% growth rate in the second quarter. But, the private sector remained in stagnation. The nominal GDP (defined as Consumption + Investment + Government Spending + Net Exports) rose by $117.6 billion ($1.29 billion/day), while federal debt grew $274.3 billion ($3.01 billion/day). That means that it took $2.33 of new debt to produce $1.00 of economic activity [GDP]. Whatever happened to the Keynesian theory that every government stimulus dollar produces $2-$3 of economic activity? Would anyone in their right mind sign up to repay a $233,000 loan principal balance when the bank was only going to fund $100,000? Insanity, you say? Yet, that is what happened in the second quarter as shown in the GDP. When costs [debt] are increasing faster than revenue [GDP], every business leader knows that those costs have to be cut!
John Williams of Shadow Government Statistics continues to calculate inflation based on the market basket concept used in 1980. He says in his July 28 commentary, under the 1980 methodology, we would "add back roughly two-percentage points of annual inflation estimated to have been lost due to methodological changes of recent decades." These include hedonic quality adjustments (i.e., imputing a value for increased "quality") and revisions to the fixed "market basket" of goods to reflect changing consumer buying patterns. The following two graphs show the current "real" GDP series. The first graph uses the official Bureau of Economic Analysis (BEA) data as adjusted for inflation, the second uses the nominal GDP data, adjusting it with what Mr. Williams believes is a more realistic set of inflation numbers. Quite a difference!
To corroborate Mr. Williams' price index claims, a small Texas investment firm, Chapwood Investments, publishes its own price index based on a measurement of the prices of 4,000 items (including Starbucks' (SBUX) coffee, Advil (PFE), pizza, oil changes, toothpaste, etc.) for 50 major US cities. For 2011, the average price increase in those 50 cities was 9.9%, versus the 3.0% rate published by the BEA.
Given these observations, if inflation was underreported by just 1.5 percentage points, then, the second quarter's GDP was actually negative, even despite massive federal spending. This, of course, implies what many Americans already know – the '08-'09 recession never really ended.
Employment
The raw data show that in July, employment was 1.2 million lower than in June. Yet, through the magic of seasonal adjustment, plus the now discredited birth-death model resulted in a reported number of 163,000 new jobs in July (the BEA assumes approximately 50,000 more new small business are created each month than go out of business. While possibly valid in the 1990s, this is clearly a faulty assumption in today's economic environment; yet they continue to add those 50,000 jobs to the Establishment Survey each month).
The unemployment rate rose to 8.3% from 8.2% reported in June. Because the BEA reported that 163,000 jobs were created, several media outlets reported that the unemployment rate must have risen because more workers had entered the labor force ((Total Employed/Labor Force)-1 = unemployment rate). Unfortunately, the unemployment rate is calculated using a completely different survey, the Household Survey. That survey showed job losses (mainly full time jobs) of 195,000 for July and a continuing trend of people dropping out of the labor force. Because job losses were greater than the number of people dropping out of the labor force, the unemployment rate rose.
Retail Sales
Despite the fact that the raw data showed that retail sales actually fell .9% in July from $405.8 billion in June to $402.0 billion, once again, through the magic of seasonal adjustment, the Census Bureau declared that they actually rose $1.9 billion (.8%). On August 14, the Zerohedge blog questioned the veracity of the numbers, noting that over the past decade, the seasonal adjustment process has always subtracted from the raw data ($5.9 billion on average from '02 thru '11). The table shows the Not Seasonally Adjusted and Seasonally Adjusted data for both July and June from 2000 to 2012. Note that the seasonal adjustment process consistently subtracts from June's raw data. For July, one has to go all the way back to 2001 to find a time when the seasonal adjustment process added sales to the July raw data.
At the end of the year, the sum total of all retail sales for all months of the year should be the same in both Seasonally Adjusted and Not Seasonally Adjusted series. That is, the seasonal adjustment process is supposed to smooth out the data to remove the impacts of seasonal events (Christmas, Easter, Back to School, etc.). So, what seasonal or social pattern changed so dramatically in July of 2012 from the past decade to allow the addition of $1.94 billion? None that I can think of. Because the seasonal factors must, on net, be neutral by years' end, I suspect that we will be seeing weaker than expected seasonally adjusted retail sales going forward. Of course, there is always the possibility that, unannounced to the public, a few billion dollars were "borrowed" from past data and added to current data. But let's not go there yet."(snip)




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