Pro Forma GDP and the Feel Good Society

The LA Times is reporting GDP Data Are Weak and, Many Say, Off Base.

The U.S. economy grew at a surprisingly weak 1.1% annual rate in the last three months of 2005, the Commerce Department said Friday, but many analysts said the economy was more robust than reported and would rebound in the current quarter. It was the slowest growth rate since the 0.2% posted in the fourth quarter of 2002, when the economy was struggling to recover from the 2001 recession.

The report came at a time when polls show that many Americans are skeptical about the economy's strength. A nationwide Los Angeles Times/Bloomberg poll, released Thursday, said 59% of respondents disapproved of the way President Bush was handling the economy.

The Bush administration and many experts, however, expressed doubt at the accuracy of the latest growth report, suggesting that it was at odds with other economic data. They predicted that the numbers would be revised upward.

"The fourth quarter was soft, but it wasn't this soft," said Mark Zandi, chief economist for Moody's Economy.com in West Chester, Pa. With recent reports suggesting strengthening job creation and business spending, "the economy is not growing at 1%. It feels more like 4%," Zandi said.

Business investment grew at 2.8%, down from a 8.5% gain in the third quarter. Federal government spending fell 7%, hit by a 13.1% drop in defense outlays. Exports grew 2.4%, and imports jumped 9.1%.

Consumer spending, which accounts for more than two-thirds of the economy, rose only 1.1%. That was far slower than the 4.1% gain in the third quarter and the slowest since the second quarter of 2001, when the economy was mired in recession. Purchases of big-ticket "durable" goods, such as cars, plunged 17.5%, the biggest fall in nearly 20 years.

Business investment grew at 2.8%, down from a 8.5% gain in the third quarter. Federal government spending fell 7%, hit by a 13.1% drop in defense outlays. Exports grew 2.4%, and imports jumped 9.1%.

But analysts said the numbers failed to tell the entire story.
Auto sales plunged because carmakers' "employee discount" offers during the summer pulled sales from the fourth quarter into the third. Excluding big-ticket goods such as autos, consumer spending actually grew faster in the fourth quarter than in the previous period.

Businesses also appeared to have pushed spending on vehicles into the summer, economist Zandi said. And the fall in defense spending didn't seem logical given the continuing Iraq war. Some outlays may have been pushed back or forward, he said.
Government spending on hurricane recovery efforts "didn't show up at all" in the report, Zandi said, suggesting that data collectors had incomplete figures on government relief checks for victims of hurricanes Katrina and Rita. "When lots of [unusual] things are going on, it's easier to get it wrong."

It feels like 4%! To who besides Zandi? Then again, if we want to measure the ultimate "feel good society" (CEOs and wall street brokers with their stock options, bonuses, and enormous base salaries) the GDP probably feels more like 68% than 1%. To the working class with falling real wages it might feel more like -5%.

Why is it economists were cheerleading the 3rd quarter results and made no mention that sales were pulled forward, yet that excuse is made today? It seems to me that if big ticket numbers are bad, economists like Zandi want to discount them, otherwise they want to lead the parade. Why not just smooth the results like CSCO and GE did for so many years?

Then again, perhaps it's time to launch a new product that will keep everyone happy: pro forma GDP announcements. Who wants to hear bad news anyway? Wait a second. Attentive Mish bloggers realize we already have pro forma GDP reporting as noted in Grossly Distorted Procedures.

With that in mind, it seems we need to take pro forma GDP reporting to the next logical level by excluding "one time events" such as the 4th quarter disaster in auto sales. Still, that might not be enough to appease those wearing rose coloured glasses like Zandi or the super cheerleaders like Treasury Secretary John Snow.

"I would not read too much into today's numbers, Snow said. They are somewhat anomalous, reflecting some special factors. They are not consistent with other data on the U.S. economy which paint a picture of good growth."

Obviously then, we need to measure how things "feel" and incorporate those feelings back into the numbers. Unfortunately it seems "59% of respondents disapproved of the way President Bush was handling the economy". Wow, are those people right or are Snow and Zandi right?

It must be a sampling error. To ensure more accurate readings, the sampling algorithm needs to overweight input from those people whose opinions really matter such as the "feel good society", the Bush administration, and economists like Zandi. If we can just do that, we can come up with some truly astonishing pro forma GDP numbers bound to please everyone.

But why stop there? Why not futures on GDP numbers, options on those futures, and a full array of whisper numbers and other valuable products to further pad the pockets of the "feel good society"? That should make everyone feel better. Shouldn't it?

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/