GDP's massive downward revision

You probably remember when the advanced GDP report was released on October 29th and the number beat even the most optimistic estimates.

All three major indices surged higher following reports that GDP grew 3.5% in the third quarter. That was better than the 3.2% rate economists were expecting.

Bonddad crowed about it. Stocks show up.

Can you imagine what would have happened if the GDP number instead of beating estimates by 0.3% it missed the mark by a full percentage? Well, that is exactly what really happened.

Gross domestic product, the broadest measure of the nation's economic activity, grew at an annual rate of only 2.2% in the three months ending in September.

Can you imagine how much the stock market would have dropped if the real number was reported first, instead of the incorrect number? Even Goldman Sachs' Edward F. McKelvey admits that the degree of revision is unusual.

This was a much larger than normal revision for the third pass on a given quarter, knocking what once was a fairly robust 3.5% bounce down to a mediocre 2.2% (from 2.8% prior to this revision)....The third cut on given quarter does not usually produce much of a change in the growth estimate.

Bonddad hasn't commented on the downward revised number, although he still believes that people skeptical of the government's headline economic numbers are hysterical.

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This is HUGE!!!

Let's just "skip out" on Bonddad. While he's known to folks who came from DK and also read the HuffPo, in the economics world, where we actually reside, he's not widely read. I know HuffPo has him on there, but frankly I don't get why, except maybe DK legacy. He's busy trying to use the Internets to smear the site, so ya know, at that point I sure wouldn't give him any more "press", even negative.

Let's just get away from that and do our own groove econ thing and keep working to make EP as good as we can make it and not "elite" in the process.

But in terms of the network of econ/financial blogs as well as "main stream" economists, I think we should put the focus (not personal, just on content), on those "green shoots, everything's ok, free markets work and cycles resolve, ain't nothing here structurally happening" folk.

I'm more interested in covering this new revision! I saw this and so glad you caught it because this is major. The advanced was 3.5%, the next revision was 2.8% now we're 2.2%!

That's HUGE in terms of economic forecasts and implies now a host of indicators which heavily weight GDP estimates should be revised!

It's also HUGE because the Q4 GDP consensus is being upped quite a bit and much of that is based on trend lines....and those trend lines are in part based on the previous Q3 GDP (not total, but some).

I hope to dig out a few indicators later and break them down in terms of which have GDP as part of their trends.

THIS IS HUGE! Believe this or not, it helps some to explain why no jobs....the higher the GDP is with no jobs...
in my head, we must then look at phantom GDP, offshore outsourcing to explain the divergence.

I mean this is HUGE and in the MSM, it's buried while "surprising home sales" is the headline...

Jesus! Going from headline buster, the recession is over of 3.5% to now 2.2%, which oh yeah, rah, that's positive, when we know GDP has to be 1%-2% just to maintain some "status quo" due to population growth....

boy.

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Consider the stimulus

The final number is 2.2%.
The Cash4Klunkers program alone accounted for 1.7% of GDP, or 70% of GDP.

I haven't found the numbers for how much HAMP contributed to the GDP, but I'm willing to bet that the GDP would be negative if it wasn't for government stimulus spending.

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Correction

I just found this.

Growth was bolstered by consumption gaining 2.9% on the back of autos contributing 0.81 point to growth. That was a direct result of the August "Cash for Clunkers" program that subsidized new auto purchases.
In addition, residential investment added 0.45 point to the growth rate, its first add since 2006. This reflected the first-time homebuyer tax credit of up to $8,000 that brought out buyers as home prices fell.

So that makes 1.26% of the 2.2% GDP was from these government tax credits that contribute to higher consumer debt levels and rob from future sales.

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if I can get to this

I was going to do a blog "overview" post on this with a host of other major EIs....graph o rama too later.

but from what I saw it's private investment just plain tanked...and this is super bad....

but on the "cash for clunkers" it doesn't really look like sales were hit too badly once the "clunkers" was done...

I think a lot of that had to do with the severity of the "trough" of Q1,Q2 2009 plus I think people didn't buy cars due to the bankruptcies of what was happening overall in autos.

I mean I know I got a STEAL on a GM because I got a gas guzzler (20 mpg highway) 4x4 right after the oil bubble popped and right as GM was about to declare bankruptcy.

You couldn't give these things away. There was range rovers going for $2500 bucks when they are pretty nice actually.

But it seems like all of that "brand name negative" is gone.

Anywho it's private investment, which is the "Real" economy, which is seriously tanked.

Did you see the tax credits propping up home sales?

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economics and personalities

I disagree with your notion that making an economic blog “as good as we can make it” entails dehumanizing the discussion i.e. only talking about numbers. The economy is the product of human influences and decisions. Not to understand the character of the people who influence and make the decisions is to not understand the economy. This is not to say that ad hominem personal attacks are should be condoned.

This week I listened to Tim Geithener testify before the TARP oversight committee. This is the second time I have listen to him testify. Last was the House Banking Comm. I was shocked at his arrogance and indeed disrespectful tone then. But, that was nothing compared to the way he talked to Elizabeth Warren. For example, she said: “ I don’t understand why money is not getting to small banks.” His reply: “It’s really not all that complicated.” How condescending can you be to a person of her stature and responsibility?

Interestingly, last week she made the same point on CNBS and the interviewer suggested that she should be on an MSNBC show. I wonder if there is some sexism going on here. Intellectually she is a giant. How can you explain such disrespect? But, more to my point, the disrespect cannot be ignored if one is going to EXPLAIN the economy not just DESCRIBE it. Explanation, which is the essence of science, cannot be achieved without the personality variable factored in.

Today Mish called Geithener arrogant and ignorant. It is an important fact to be put into the economic discussion. It is important that we understand the personalities of economics, if you are going to understand and thereby change the economy. Similarly, Bonddad. Attention should be called to him because he has influence and he illustrates a category of economic thinkers that have to be addressed.

He and NDD have responded to the change in the GDP numbers in my mind pathetically. Nevertheless, to ignore them is to ignore the major ideologically factor governing public opinion and gov’t decisions.

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slander campaign vs. public figures

This is just the guidelines of EP, we're trying to focus on the facts, the stats, the quantifiable. There are plenty of other sites doing personalities and while public personalities such as Geithner, Summers and so on are fair game on EP, the idea here is to get the focus on what's really important, what affects us economically...
which is HUGE in terms of all other things and that's what is so often missing on blogs.

So, that's why I'm saying this. Who cares what some other sites say, it's not EP's function to do daily "call out"...
our goal is to create an online space where regular folk, anyone (and that includes Harvard Professors and we do have some posting here), can write on economic topics, policy and have some discussion..

The idea of EP is to get the focus not on emotional generalities but on specifics, to dig around for very detailed, quantifiable details ....

because this is precisely how the middle class gets screwed....we do not pay attention to the details and legislation has to be the worst.

and it's tough...esp. on legislation to watchdog those details but even in daily economic reports, as you can see by your comment...

the spin is in and it's major. But the actual data says something different quite often. Just look at existing home sales from yesterday as an example, or last week's state unemployment numbers...

So frankly there is a lot of things out there I personally ignore because they do not give me too much insight and are often wrong, things that are consistently wrong, ya know, I stop paying attention. ...hey, it's 2009 and you can DIY economic analysis these days, with just a little personal education and that's because so much of the data/databases are online now. I mean you have to understand what you're looking at, so why bother reading those who are consistently incorrect and playing "graph o rama cherry pick"?

There are a host of diligent economics folk out there who are doing an exceptional job....experts economists, and they are using the blogs because either you cannot fit this kind of analysis in a 2 minute sound byte on cable news and/or the blogs allow one to write up details for immediate viewing. They put their Academic research on line too.....it's just a matter of getting the general public to start focusing in on this and not say, what Tiger Woods did with his gonads (or latest person du jour or whatever the non-story 24/7 story is).

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Personality – independent variable

The purpose of EP is respected and not to be challenged. That was not my intention. Rather, mine was about the nature of economics. If the sole or primary purpose is to DESCRIBE than the numbers are the only thing that is to be considered. Mine has nothing to do with slander. Where did that come from?

However, if there is any intention to EXPLAIN and indeed affect CHANGE in economic policy, and my impression is that explanation and change are objectives (else what is the meaning of Populist), then I posit that explanation is not complete without reference to personality. Geithner, for example, is making policy decisions. In part they can be explained by economic variables, but I believe that his ego, career objective, personal wealth, the egos, career objectives and wealth of the clique that put him in office can not be ignored. They are explanatory variables. Bonddad and NDD are carrying Geithner’s water ( promoting his policies) so they to are part of the EXPLANATION of what policies are put in place.

Again, it is not my intention to convince you to change the policy of your blog. Only to posit that if the objective of your blog is to EXPLAIN and CHANGE economic policy than you will not succeed with out personality variables. That is an epistemolgical proposition. For example, your often stated concern about WTO and other foreign trade policies that you think put the US at a disadvantage. You can describe the inequities statistically on ad infinitum but you will not explain why the polices exist until you consider who is promoting them in government and opinion makers supporting them. If you do not explain only complain, then there will not be a change.

You ask: “Why bother reading those who are consistently incorrect and playing "graph o rama cherry pick"? So we should ignore Geithner and the FED chair because they are incorrect? We should ignore public opinion makers because they are in correct? If the only thing you are interested in is being right then I agree. But, to understand the economy is to understand why people and the policies they promote are wrong. Anyone who considers that public opinion is a variable that affects government policy has to care about those who are both wrong and effective. If a blog is affecting public opinion or is representative of public opinion then it cannot be ignored. I think Rush Limbaugh is a fool. But, I listen to him every chance I get because he has enormous affect on public opinion and in turn public policy – including economic policy.

But, again it is not my intention to affect EP and I will not place comments inconsistent with its policy.
Best

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the answers are in the numbers

I think that's the difference. One can look at policy, at the number themselves, at the EIs themselves, at the legislation itself to find the corruption and flaws.

So, the point is to look at the data and accurate get a grip on it.....then you can determine, for example, that Geithner gave away the store to AIG for no legitimate reason.

Also, I'm referring to certain bloggers, there is too much huge economic insanity going on that is squeezing the U.S. middle class to get into all of that type of rot.

Don't worry, you're fine, although I do believe many focus on personalities because it's more difficult to get a handle on EIs, read legislation, read policy, understand the implications, but it's only by digging in that deep, at least in my opinion, does one stand a prayer's chance of stopping it.

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All Anonymous Drive-Bys, read this

ya all, I'm aware we have a ton of lurkers (readers who do not comment) as well as a group of anonymous comment people who comment say once a week.

Ya all, consider creating an account on EP so you can track your comments and we can identify you by some freaky, funky name you made for yourself.

While you know what you said, anonymous comments are all lumped in together, we cannot differentiate one anonymous drive by from the next one.

So, come on, join in, you help add to EP, give good input, intel, be nice if you had an account!

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We have a credit money system!

And I think that's where the disconnect lies. Consumers don't want to borrow because they are already overburdened by debt but lenders don't want to lend either. This is the new normal.

As for inventory liquidations - what if the anticipated inventory bounce not exist because of the use of 'just in time' inventory practices? I think green shoots people are looking at the inventory liquidations and saying wow businesses must rebuild those inventories and when they do watch out - to me that's OLD SCHOOL.

RebelCapitalist.com - Financial Information for the Rest of Us.

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just-in-time

If just-in-time governs inventory decisions (NEW SCHOOL) then how do you explain inventory liquidation? Just-in-time would preclude significant inventory to liquidate.

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Just in time may support significant

inventory liquidations we are seeing now and may minimize the positive effects of potential restocking. This is just a theory on my part.

I am searching for any research regarding this topic.

RebelCapitalist.com - Financial Information for the Rest of Us.

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RE: Inventory

I found this post by post by Prof. Hamilton @ Econbrowser. Notice the graph (for some reason I couldn't post it here) which shows that improvements in inventory management have had on inventory investment as a % of GDP.

My theory is that inventory investment or restocking won't save us.

RebelCapitalist.com - Financial Information for the Rest of Us.

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Just in time etc

Thank you for the link. However, I must admit it is a little above my pay grade, as they say. I’m not sure I fully understand it. Nevertheless, just to make myself clear: I believer that ‘just-in-time’ is a manufacturing inventory concept, but I don’t think it’s applicable to wholesale and retailing. For example, an automobile assembly plant at one time had to inventory large stocks of parts to supply its assembly lines. With ‘just-in-time’ it is no longer necessary to inventory parts. By definition, they arrive at the assembly plant just in time to go into the assembly line.

However, auto dealerships still have to inventory cars. They cannot get a car just in time to sell it. They need large lots filled with a variety of cars for customers to choose from. Similarly, department stores and other retail outlets and wholesalers who supply retailers.

Thus, the current inventory liquidation phase that is postulate the economy is going though must be wholesale/retail liquidation. Again, manufacturers who are on a just in time system have little or no inventory liquidate.

Thus, regarding inventory rebuilding, again, just in time would not be a relevant concept because it applies to manufacturing and they don’t build inventory. However, if wholesalers/retailers have liquidated their inventories, then it is plausible that they will rebuild in the coming months. Emphasis on plausible! And, how that will affect GDP is questionable as per your link and theory.

More generally, the concept of just in time is one that I think has not been fully explored in terms of the change in world economic systems and ours. Up though about 1975, I believe that vertical integration was thought to be the most efficient organization plan; in part because it was the only way to insure that component parts would be available in time for assembly. Increased efficiency of transpiration systems (e.g. interstate highways, container ships, etc.) and computer information systems made just in time possible and in turn led to the break up of vertically integrated companies and brought on outsourcing and all the economic implications that has.

For example, in the 1960’s Kodak embarked on a massive multi plant-building complex called Elmgrove in a Rochester NY suburb. It was so building and labor intensive that a special expressway exit was built off of the expressway to get into the complex. Today, all those new buildings have been sold off and many older buildings have been torn down. In the Monday morning quarterbacking department, people now say how foolish Kodak was to build all those buildings. Yet, in the 1960s, the concept of vertical integration was still considered efficient organization. Indeed, Kodak was such a successful company because it was vertically integrated. Does anyone think that Henry Ford who practically invented vertical integration was foolish even though Ford today has turned to outsourcing?

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Just in Time Anonymous, read this

See the upper right hand corner? Create an account and login. That way you avoid captcha and you have some sort of id name so people can respond and it's easier to have a conversation.

All folk who are writing a lot of anonymous comments, please consider this....

it's SO much better, the site is and usable if you create accounts.

For the most part, your analysis on inventories is correct and good ....

that's the theory, they wipe out inventories and they have to hire to rebuild them.

I do believe manufacturing keeps some inventory around as wholesale.

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