The economy appears to be decelerating. Consider that the advance estimate 4Q2013 GDP was 3.2% growth while GDP growth in the previous quarter (3Q2013) was 4.1%. Currently the headlines of components used to compile 1Q2014 GDP are not pretty.
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I am not a lover of GDP to measure economic activity at the Main Street level.
- Although one can understand that imports export the money from the economy which could be multiplied – it fails to recognize at least the first spending by business and consumers as adding to the economy – and loses measuring this activity.
- Secondly, this inventory component (GDP measures production and credits inventory levels in GDP) – this creates a wobble or noise – and creates a situation where the start of recessions are not easy to identify (inventory buildups are a canary for recession starts).
Figure 1 – Consumption Based GDP [crediting imports, crediting only the deltas in inventory, and not adjusting for inflation](blue line) and Seasonally Adjusted Headline GDP [unadjusted for inflation] (red line)
GDP was seen as strengthening in the last half of 2013. However, the real strengthening at Main Street level was significantly less than the headlines would suggest. Further, if one adjusts for inflation – the Main Street economy is growing a little above 1% (subtracting the GDP deflator in figure 2 from the values in figure 1).
Figure 2 – GDP Inflation Deflator
Headline GDP is annualized quarter data – not year-over-year data (figure 1 uses year-over-year). So if there are anomalies in the seasonal adjustment methodology – this headline measurement is flawed. [Note that the BEA does not publicly release unadjusted GDP data.] I fear there are so many failure points in the way GDP is determined, that one cannot take the GDP data as accurate. Further, consider that the New Normal nuances have not settled down. The economic data showed weakness in the first part of 2013, and an even larger weakness is now beginning to appear in 2014. One wonders how seasonal adjustment is adjusting for this effect?
