More GDP Magic

The sleight of hand at the Bureau of Economic Analysis (BEA) was outstanding in this morning's revision to Q4 2009 GDP.  I'm not talking about the inventory rebuild that boosted the output measure by 3.88 percentage points. That was legitimate, but regrettably unsustainable, as final demand will prove absent.

What stood out in the report was the revision in the BEA's inflation data. The GDP price gauge climbed at a 0.4 percent annual rate, less than the 0.6 percent median forecast of economists surveyed. Yes, you read that correctly. The BEA claim is that inflation for the fourth quarter of 2009 ran at a .4% annualized rate!

I am aware that GDP measures domestic output, so import prices are not factored into the equation. But how can domestic inflation be dramatically less than foreign purchases if the US dollar surged in December? The release contained data on gross domestic purchases, which increased at an annual rate of 1.9%. The BEA readily admits overall inflation was rising at nearly a 2% annual rate. However, without a significant drop in the value of the US dollar-which clearly was not the case in Q4-there should not be any dramatic price differences between domestic and foreign purchases.

Using other government-derived data on inflation (CPI and PPI) to more accurately adjust nominal GDP; real GDP should have posted a more modest gain of about 3.3%.

That is positive growth for sure but much less than reported and significantly below par. Especially in light of the fact that for all of 2009 the economy shrank 2.4 percent, which is the worst yearly performance since 1946.