How Fast is the Economy Growing?

HOW FAST IS THE ECONOMY GROWING?….Did GDP increase 1.6% last quarter? Only if you believe that auto production increased 26%, the estimate used by the BEA in its calculation of 3rd quarter GDP. But as Nouriel Roubini says, this hardly seems believable:

During Q3 all the major US automakers ? Ford, GM, Chrysler ? announced production cuts for both Q3 and Q4. So, how could the folks at BEA argue and estimate that production went up by a whopping 26%? These data also do not make any sense as the Federal Reserve Board data on automotive production in Q3 show a sharp fall in production of motor vehicles of 12%

So what’s going on? One possibility: the BEA calculation uses a price deflator based on wholesale light-truck prices, which tanked in the third quarter. When you plug that into the formula for all auto production, it gives you a falsely large estimate of auto sales.

Another possibility: the BEA’s seasonal adjustment formula (Q3 is when automakers retool their plants and blow out their existing inventory) is wrong. Dean Baker points out that BEA may have a systematic problem here, since the Q3 numbers for the past three years show increases in auto production of 17%, 23%, and 26%, all of which seem rather too high to believe.

Yet another: the BEA is right. The Fed tracks auto production, while the BEA tracks auto consumption, which is the right thing to do for GDP calculations. It’s entirely possible that carmakers have reduced production but still increased sales by slashing prices and selling off inventory.

I have no idea which of these is correct. But if you’re interested, the commenters over at Brad DeLong’s place are holding a seminar on the topic. It’s your chance to learn a little bit about how GDP accounts are calculated. And while that may sound dry, anything is better than listening to the latest campaign nonsense, isn’t it?

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