Sunday, November 29, 2009

Gross Domestic Product (GDP) Mumbo Jumbo

Give me a break!

by: Larry Walker, Jr.

Worthless Government Statistics

It was just back on November 3rd when the Bureau of Economic Analysis (BEA), a division of the U.S. Commerce Department, declared that Gross Domestic Product grew at an annual rate of 3.5% during the 3rd quarter of 2009. Then on November 23rd, the Bureau declared that the revised rate of growth for the 3rd quarter was only 2.8%. The question that came to mind, right away, was: What exactly does this mean?

Click to Enlarge

First of all what it does NOT mean is that the economy grew at the rate of 2.8% during the 3rd quarter of 2009. The rate of 2.8% is derived by taking the rate of increase from the 2nd quarter to the 3rd quarter of 0.70% and assuming that this will stay constant for the next 3 quarters (0.70% times 4). Why is this a bogus way of measuring the economy?

When I open my quarterly 401K statement and it reads that my portfolio has increased by 8.0% during the recent period, I don’t automatically assume that my annual rate of return is 32.0% (8.0% times 4). No, on the contrary, I look at the past four quarters to determine my annual return. If I lost 8.0% in the previous three quarters combined, and then gained 8.0% in the most recent quarter, then I am close to breaking even. But have I broken even? No.

To demonstrate, let’s assume my portfolio was valued at $100,000 at the end of the previous fiscal year. After declining by 8.0% in the succeeding three quarters, the value had dropped to $92,000 ($100,000 times 0.92). Now, after gaining 8.0% in the most recent quarter, the value of my portfolio has increased to $99,360 ($92,000 times 1.08). You will note that I have yet to break even. I am in fact still down by 0.64% ($640 divided by $100,000) having started with $100,000 and declined to $99,360 over the past four quarters. So much for growth. Now back to GDP.

GDP has declined by 1.42% over the past four quarters

Now when it comes to GDP, a more reasonable way to look at our present rate of growth, similar to measuring an investment portfolio, is to look at the past 4 quarters. Since the BEA only publishes figures in annual terms, I will approach this by using their figures, but keep in mind that the quarterly GDP figures are shown as annual amounts (in billions).

  • 4th Quarter 2008 - $14,347.3

  • 1st Quarter 2009 - $14,178.0

  • 2nd Quarter 2009 - $14,151.2

  • 3rd Quarter 2009 - $14,266.3

Dividing the above by four, the average GDP over the past four quarters is $14,235.7 billion. The final GDP figure for all of 2008 was $14,441.4. So GDP has dropped by $205.7 billion ($14,441.4 minus $14,235.7) over the past four quarters. That equals a percentage drop of 1.42% ($205.7 divided by $14,441.4) since 2008.

GDP has declined at the rate of 1.21% since 2008

An even more accurate way to look at this is to start with the 2008 total GDP of $14,441.4 billion and to measure the decline over the next three quarters. In this respect GDP declined by 1.82% in the 1st quarter of 2009, by another 0.19% in the 2nd quarter of 2009, and then improved by 0.80% in the 3rd quarter of 2009. Overall GDP has declined by 1.21% since 2008. This is the statistic that’s most meaningful to me.

GDP has declined at the rate of 1.21% since 2008. In dollar terms that’s $175.1 billion per year in lost production in our economy. That’s the equivalent of losing 3.5 million jobs paying $50,000 per year. That’s more meaningful to me than the BEA’s mumbo jumbo.

GDP growth averaged 4.93% per year from 2003 to 2008

While we are at it, you will note on the chart above that GDP was $11,142.1 billion in 2003 and grew to $14,441.4 billion in 2008. That’s an increase of 29.6% over the six-year period, or an average of 4.93% per year. It also represents an increase of $3,299 billion in U.S. production over the period. That’s the equivalent of an increase of around 65.9 million jobs paying $50,000 per year.

So wake me up when Obama’s economy killing policies have created 65.9 million jobs, or when GDP reaches $18,490.7 billion (an increase of 29.6% from today’s level), whichever comes first, but don’t bother me with meaningless government statistics.


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