Barry Ritholtz over at The Big Picture has looked at the latest revisions to the GDP estimate for the first Quarter and asks:

… at what point do we cross the line from maintaining a healthy optimistic outlook to cynically manipulating data in boldfaced contradiction of reality?

A couple of definitions:

GDP: The total market value of all final goods and services produced in a country in a given year and the value of exports, minus the value of imports.  GDP includes only goods and services produced within the geographic boundaries of the country.

GDP Deflator: Current dollar GDP divided by constant dollar GDP. A ratio used to account for (i.e., eliminate) the effects of inflation.  

Economists apply the GDP deflator to the GDP to be able to compare the first quarter of 2004 to the first quarter of 1973.  It’s a statistical ‘trick’ but a valid one.  

Most of the time.

And that’s when the latest numbers get hinky.  

The latest number from the Commerce Department (I won’t link as I assume either you know where it is or you don’t care) revises the 1st Quarter (1Q) of 2005 from the original 3.1% to 3.8%.  An upward revision of this magnitude or approximately $64,400,000,000 is unusual – to say the least.  To put that figure in perspective it roughly equals the total average income from 69,621,621,620 jobs, roughly 1/2 of the total US workforce, at an estimated average US salary of $37,000/year.

It’s big.

This isn’t impossible.  One of the reasons the Commerce Department crunches these numbers is to be able to get an objective overall summation of what the economy is doing.  It may very well be the US economy is booming along & doing just ducky – Thank You very much.  And if this was happening this would be great.

But …

Mr. Ritholtz puts it like this:

Within GDP data, the revision of the Residential Housing is simply too hard to believe: This is data that’s widely available from the NAR amongst others. To get there, you need a significant DROP in home prices.


Yup, you got it.  Or as Mr. Ritholtz writes:

Yesterday’s upwardly revised GDP data is believable only if you accept the premise that HOME PRICES WENT DOWN IN Q1 2005.  

I’m not going to recapitulate Mr. Ritholtz’s analysis, you can get that at the link, but it is easy to see this is what is called “bullshit” (sorry for the economics jargon.:-)  There is no evidence house prices fell in the 1Q but rather the opposite.  Jerome has writ many a diary expounding on this so I’m not going to go there, either.

The reason this gets interesting is the GDP number is used by financial journalists to write about things – such as the economy – they don’t understand.  While there are valid uses for the quarterly GDP numbers in the financial press they are used as a superficial means to give an superficial impression of what is happening in the economy and the numbers are rarely subject to analysis within the differing media.  

Additionally, the revision can be used by the GOP to attempt to shore-up President Bush’s plummenting approval ratings on his handling of the economy.

With that it becomes clear why the number was revised.

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