Monday, September 29, 2008

Don't Trust the GDP Deflator? Don't Use It

The BEA reported a GDP deflator of 1.1% annualized in the second quarter, while the BLS reported CPI at 7.9% over that same time frame (I understand they are different calculations, but give me a break...) So I thought, ignore it...

The result is of course nominal GDP. In Q2, year over year nominal GDP came in at 2.4% down from 3.0% in Q1. As long as inflation is level (it wasn't), nominal GDP can be used to show growth on a relative basis. However, over the past few years inflation has been rising, thus the nominal GDP figure (although declining) has overstated growth on a relative basis.

Taking the nominal GDP figure and removing year over year CPI, we see a vastly different situation than what the BEA would have you believe. In fact we see a GDP less CPI print at a level (-2.5%) last seen during the recession of the early 1990's.

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