Economic Growth vs. GDP Growth plus The Gimmicks and Hedonics

Commerce Department reported 5.7% annualized economic growth in the economy in the fourth quarter of last year. This number is not representative at all of the economic realities, most importantly that related to unemployment pains and prosperity of the people of the United States. There are several problems with a percentage growth number such as a positive 5.7%. For one, it doe not tell you anything about what has been going on before that period. For example the economy could have shrunk 30% in the year or period before and a little bounce of 5.7% does not do anything to make up for the losses. For one we are starting at 70% of the previous, so in absolute terms that 5.7% is actually 5.7% times 70% which is 3.99% of the original level. So you cannot take these numbers at face value, especially in an area where even 0.25% makes a humongous difference. There is another problem. A lot of that growth came from government stimulus plans and other government related activities. Also, a lot of the jump came from the huge stock market jump be it from blatant manipulation or not. The likelihood of another 70% jump in the market is slim, so that growth is not going to continue. Similarly, according to the Commerce Department 60% of the growth came from a sharp slowdown in inventory reduction by companies. That, too, is a one time effect.


One more issue is the level of the dollar. Government is still using 2002 stable dollars. That level is roughly 40% higher than today's dollar. That gives a double boost to net exports. First making imports cheaper. Second getting advantage of the lower dollar in terms of increased exports, but valuing them at the higher 2002 prices. In economics 101 terms, it is taking advantage of both the price effect and the volume effect. We all know this is a serious case of having your cake and eating it, too. This whole scheme is adding at least 0.75% to 1.50% to the overall number depending on the quarter.


Third thing is hedonics, which I am attaching a video by Chris Martenson -who has great videos on his website www.chrismartenson.com called the Crash Course which I highly recommend all of you to watch. Hedonics are effective in both inflation numbers and GDP numbers. Martenson's video explains this really well, but to give an example, government is including a number for people who own their homes in the GDP number as if these people are paying themselves rent. This is obviously a non-cash event and does not belong in the GDP. There are several other gimmicks in the GDP data some of which Martenson talks about. 


Similar gimmicks in inflation data affect the GDP numbers through the GDP deflator which is almost consistently understated showing the inflammatory effect of inflation as if it were real growth. Martenson talks about this in his video, too.


Here are the videos: