By now we all know better than to accept government statistics at face value. After all, if the BLS can fudge the JOLTS report, what prevents the Bureau of Economic Analysis from doing the same thing with the GDP numbers?
Real gross domestic product (GDP) increased at an annual rate of 2.1 percent in the second quarter of 2023 (table 1), according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent.
The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 2.4 percent (refer to "Updates to GDP"). The updated estimates primarily reflected downward revisions to private inventory investment and nonresidential fixed investment that were partly offset by an upward revision to state and local government spending.
As the news release acknowledges, the additional data for the second estimate all resulted in reductions to various categories within the BEA’s data set. With data reductions seemingly broadly spread across the BEA data set, we are left to ponder where exactly was there real economic growth?
Was there any economic growth at all?
Let us see what the data can tell us.
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When we look at the data from the BEA analysis, one thing that stands out straight away is that even the BEA’s assessment shows that not all parts of the economy grew during the second quarter. Consumer spending and imports were the main contributors to the that 2.1% GDP growth rate, while exports were in fact a draw away from the BEA assessment.
Certainly the retail sales figures compiled by the U.S. Census reflect a rise in consumer spending of about the correct magnitude during the second quarter. From March through June of 2023, retail sales in this country rose by 1.4%.
The rise in retail sales is supported by a net rise in real incomes, as evidenced by a comparison between the percentage increase in average earnings and the headline inflation rate per the CPI. Even net of revisions, the BLS data shows real wages rising during Q2; consumers had at least some real income to support additional spending.
The growth in real wages during the second quarter is complemented by an apparent growth in employment (at least, going by the BLS jobs data) during the second quarter.
While we may dispute the numbers, there does appear to be an increasing in hiring during the second quarter, which would be consistent with the rise in consumer spending.
However, while there are some confirmations that consumer spending did indeed rise during the second quarter, there are some aspects to that which are even within the BEA analysis deserving of some skepticism.
Not the least of this is the impact of inflation. For all of the attention paid to the BEA’s Personal Consumption Expenditure Price Index and the BLS’ Consumer Price Index, when assessing GDP growth the BEA uses yet another inflation metric, the Gross Domestic Purchase Price Index.
Gross domestic purchases prices, the prices of goods and services purchased by U.S. residents, increased 1.7 percent in the second quarter after increasing 3.8 percent in the first quarter. Excluding food and energy, prices increased 2.4 percent after increasing 4.2 percent.
Personal consumption expenditure (PCE) prices increased 2.5 percent in the second quarter after increasing 4.1 percent in the first quarter. Excluding food and energy, the PCE “core” price index increased 3.7 percent after increasing 4.9 percent.
Whether we look at this new price index quarter on quarter or year on year, vs the PCE Price Index two things immediately stand out:
Inflation for the index less food and energy is printing above the headline inflation rate.
The Gross Domestic Purchase Price Index inflation rate in 2022 was higher than the PCEPI, but in 2023 has slipped below the PCEPI. Even with comparing the two indices less food and energy we see the same tendency.
The first attribute merely highlights the impact of energy price deflation on the overall price index. The second one is notable because the PCE Price Index itself tends to be lower than the Consumer Price Index.
This immediately presents a question: with the publicly announced price indices being the CPI and the PCEPI, does the reality of the GDPPI being higher than PCEPI in 2022 but lower in 2023 mean that the BEA’s estimate of real GDP growth is exaggerated? The higher the inflation rate the lower the amount of real GDP growth, and if we include the CPI in the comparison we immediately see there is considerable variance among the price indices—and thus there is considerable variance in their impact on real GDP growth.
Given that the CPI less food and energy showed nearly double the quarter on quarter inflation rate of the GDPPI, how accurate is the BEA’s assessment of consumption-related spending and its contribution to GDP growth? Depending on which inflation metric one regards as “authoritative”, the BEA has arguably overstated growth in consumer spending by a significant amount, which in turn means overall real GDP growth is dramatically overstated.
Yet if we have doubts about the consumer spending contribution to real GDP growth, we should have even more doubts about business investment’s contribution.
The crux of the problem is this: industrial production in the US has presumably been declining since the third quarter of 2022.
Even the Services PMI (both the S&P Global/Markit index and the ISM index), while showing expansion in the US, show that expansion to be slowing and softening.
Shrinking profits and rising bankruptcies are not dynamics one typically associates with economic growth—yet the BEA is telling us that despite shrinking profits and rising bankruptcies the US still experienced 2.1% annualized real GDP growth.
Again, skepticism is warranted.
In revising the GDP estimate from the initial “advance” estimate, the BEA shaved 0.3 percentage points off its assessment of real GDP growth. When we look at the totality of economic data available, both produced by the BEA and/or the government as well as private industry metrics such as the PMI, we are left with the lingering question whether or not the BEA shaved enough.
Certainly there is an argument to be made that the BEA did not shave enough. There might even be an argument that, contrary to the BEA assessment, there was no real GDP growth during the second quarter. We must at the very least consider this possibility—to do otherwise would be to ignore the wealth of data available which tells a different narrative than the one spun by official media.
Currently, the media as well as the White House are keen on avoiding depicting the US economy as being in recession. Despite the US slipping into recession during the first half of last year, corporate media, the White House, and even the Federal Reserve all argued against the rule of thumb metric that two contractionary quarters meant a recession was underway.
While there notionally has been real GDP growth from Q3 of last year on, it is by no means certain that the US has ever emerged from recession. Just the GDP chart at the top of this article shows steadily declining GDP growth after the first half of 2022, with that GDP growth itself significantly below that of 2020 and 2021 post pandemic lockdown—with problematic data we cannot say with certainty that the US economy expanded from Q3 of last year through now.
With economic activity having favored services over goods consumption and production, and with the latter very much in a “recession” of its own, one way of squaring this odd economic circle is to view the economy as stuck in a “rolling recession”. This is the view suggested by some independent economists such as Ed Yardeni of Yardeni Research and Oren Klachkin of Oxford economics.
After years of COVID lockdowns and travel restrictions, Americans are back at airports and restaurants, looking to make up for lost time. Their rapid shift in spending habits has helped services sectors, like travel and leisure, thrive even as sectors that focus on selling goods, like manufacturing and construction, struggle.
If that continues: “Instead of a typical recession, it’s possible the economy will fall into – or in fact is already in – a ‘rolling’ recession,” Klachkin wrote.
A rolling recession is when some industries contract and suffer job losses, while others continue to grow, leaving the overall GDP growth positive, but low by historical standards.
Even if we dispense with “the ‘R’ word” and treat the recent GDP data as indicating real GDP growth, we are still left with the reality of economic growth that is low even within the fairly anemic post-pandemic lockdown economy. In both views of the data, the BEA is still overstating the condition of the US economy.
Whether we view the current data as showing recession or as showing stagflation, with relatively high consumer price inflation combined with low GDP growth or no GDP growth, the reality of the economy is the same: there is very little actual growth currently taking place. Calling it a recession or stagflation is at this point a distinction with very little difference.
The BEA is telling us the economy grew at 2.1% in the second quarter. My question to the BEA is: “where”?
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I hear funeral homes are doing pretty good.