Re-examining GDP

RE-EXAMINING GDP….Sure, consumer spending is down a bit, but GDP rose 3.9% last quarter and the Fed cut interest rates yesterday. So why is Wall Street apparently in such a panic?

Part of the reason is that credit markets are still in turmoil and earnings reports have been weak. But it might also be because no one really believes that GDP increased 3.9%. Barry Ritholtz says it’s a mirage, caused by a huge decrease in the inflation component of the GDP calculation that’s more a technical artifact than a real number. Plug in a more reasonable estimate and real GDP grew by only about 2%. Rex Nutting of MarketWatch explains what happened here.

I’m sort of agnostic about this. There are always little gotchas deep in the bowels of the national accounts numbers, and it’s never clear just how meaningful they are. But this one seems more interesting than usual, and it’s certainly unsustainable. If the inflation number makes up its lost ground next quarter, economic growth could look grim indeed.