Monday, May 30, 2011

Bad Economic News of the Day

Well we know that the economy is not improving nearly as well as we hoped, particularly 3 years on. Unfortunately, it's getting worse, or is worse then they say. From Henry Blodget:

The way the government calculates real GDP is to start with nominal GDP--the actual change in the output of the economy as measured by adding up all the actual sales prices ("nominal")--and then "deflating" this number by subtracting an estimated inflation rate. Thus, the government backs into the real GDP growth number, starting with nominal prices and then adjusting for inflation.
Well, the "GDP deflater" the government is using right now--the estimated rate of inflation--is only 1.9%. As anyone who has been to a supermarket of gas station recently can attest, this assumption is preposterously low. But the effect on "GDP growth" of using a very low inflation estimate is helpful, in that it makes real GDP growth look bigger.
So what would Q1 GDP have looked like if the government had used the government's own estimate of inflation for Q1 (5.7%), instead of 1.9%?
Q1 GDP would have been -1.82%.
Not good.

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