GDP Inflation and Employment: It’s All a Lie

Rodney Johnson |

Pinocchio_Full.jpgI’m not much for glossing over the true state of affairs just to make things look better, which is why I take issue with many government reports.

When it comes to providing clear information on the economy, the US government is more late-night pitchman than serious news anchor. And to make matters worse, many of the numbers they peddle have been “adjusted” so that reports show better results.

Statistics in this category run the gamut from gross domestic product (GDP), to inflation, and even to employment. We don’t have to look too hard at the numbers to find questionable choices. When it comes to measuring the growth of the economy, no report is more important than GDP. It sounds straightforward — add up the value of production in the US over a calendar quarter, and adjust it for inflation to determine the real rate of growth. But apparently, that’s not good enough for the US government.

Torturing the Numbers to Boost the GDP...

In the mid-1980s, the Bureau of Economic Analysis started adjusting the cost of computer equipment to reflect increasing capacity in later versions of the same equipment. Even though consumers might have been paying roughly the same amount for a new computer as they would have before, the bureau adjusted the price higher when calculating GDP. The idea was to show how much more buyers were getting with increased capacity – even though they didn’t pay any extra.

Got that? This type of adjustment is called "hedonic." It now adds over 20% to the value of GDP and affects items as far flung as clothing — or back when this was established, videocassette recorders. This chunk of money that is added to GDP never changes hands. It’s simply estimated as extra value received by the purchaser…anything to make GDP seem better.

The same sort of thing is done with inflation… but opposite. They want GDP higher and inflation lower, so they fudge the numbers accordingly. For example, a television with improved components in later models will have its price adjusted lower in inflation reports, whether or not the actual price stayed the same or even increased. What you paid $1,000 for, they may write down as $800.

Effectively, consumers are told: “TV’s cost less, you just can’t buy one for the lower price.” If it’s not available to me, then how can it count as something I would purchase? What if I don’t want the extra features? Too bad.

The inflation rate includes another curious adjustment — Owner’s Equivalent Rent. This piece of mathematical fantasy represents what a homeowner could rent his home for if he chose to. The number is included as the cost of shelter in the calculation of inflation.

Instead of performing all these mental gymnastics to arrive at an estimate of housing costs, the government could simply survey home prices. That’s what they used to do. But here’s the thing – rents don’t climb as fast as home prices. So if you’re battling inflation, you magically adjust the cost of shelter to reflect rent, instead of what it takes to actually buy a house.

It’s no coincidence that the adjustment showed up right after a period of strong inflation in the US that was very evident in home prices in the late 1970s. Guess it was too much for the BEA to take.

A Trick to Make the Unemployed Disappear

Then there’s one of my favorite economic adjustments: employment. Each month, the Bureau of Labor Statistics (BLS) estimates the number of people with jobs and those who are unemployed. They conduct a phone survey of roughly 60,000 people to ask about their work. Again, this too sounded straightforward: Do you have a job? If not, do you want a job? But as with GDP and housing costs, this proved to be too simple.

If you don’t have a job, but want to work, there are a few more questions they have to ask. How long have you been out of work? If more than four weeks, then what have you done in the last four weeks to find a job? If your answer doesn’t include filling out an application somewhere, then magically you are no longer counted as unemployed. You still don’t have a job, of course, but for the purposes of the Labor Bureau, you no longer count toward the unemployment number. Brilliant!

GDP, inflation, unemployment…these are just some of the big economic releases that move markets and sway people’s opinions about the health of the economy. And yet, the numbers reported by the government include all sorts of fudges and fixes to make the statistics more attractive than the raw numbers would be.

This is why we have to do our own homework. It is why we have to break down each report to the raw data, and then decide for ourselves where things stand. It takes a lot of research, but the payoff is worth it. With it, we can make more informed decisions for our businesses, our investments, and our families. I’d say that’s worth the extra effort.

 

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