Believe the GDP report at your peril

There were a couple of questions concerning the last blog post about the GDP that I would like to address.

Here's the first one from willid3:

I wonder if the explanation for PCE and why corporate profits are down is that the vast majority of all income in the US is earned by the top 1 percentile of incomes. and by far they are the least likely to have been layed off. and the reason corporate profits are down, is that most corporations get profits based on volume, and thats based more on the lower 95 percentile of incomes. Who are the ones who are having trouble keeping their jobs, and whose incomes have been cut the most

First, it is important to note that I only made a claim about corporate revenues, not profits.  Corporate revenues are like your base salary, in full, while corporate profits are what's left over after taxes and all legitimate expenses are deducted.

In the parlance of accounting, revenues are called "top line" results and profits are called "bottom line."    Into the top line goes everything that resulted in a cash transaction for your company.  Who owns the profits and how they are distributed are immaterial to the argument I laid out in the prior blog article which was that Personal Consumption Expenditures measure all the things that people buy and, as far as I can tell, people usually buy stuff from companies.

Which brings us to the second question.

Dr. M, I am wondering if part of the discrepancy might be due to corporate revenues that are not measured by GDP. For instance, corporate financial gains and losses are not included in GDP are they (and they've taken huge losses lately)? But they would be included in corporate revenues wouldn't they? Or do the revenues being reported not include financial earnings/losses? Thanks.


In fact, corporate revenues are measured by the GDP report, but not always directly nor in their entirety.  As it turns out, measuring the entire output of an economy is a devilishly tricky business and I take my hat off to those who dedicate themselves trying to do so.  But I lose some of that goodwill when the results are trumpeted by others as though there were no margin of error involved.  Then I lose most of the remainder when I detect a consistent upwards bias to the results which hint at errors that are not random, meaning not honest.

From the BEA we learn this:

For the initial monthly estimates of quarterly GDP, data on about 25 percent of GDP—especially in the service sector—are not available, and so these sectors of the economy are estimated based on past trends and whatever related data are available.

For example, estimates of consumer spending for electricity and gas are extrapolated using past heating and cooling degree data and the actual temperatures, while spending for medical care, education, and welfare services are extrapolated using employment, hours, and earnings data for these sectors from the Bureau of Labor Statistics.

Remember all the time we've spent hashing through the ways in which the BLS churns out simply unbelievable employment data using models and methods that are consistently biased to the upside?  Well it turns out that their output is the GDP's input.  At least for some of the extrapolated expenditures.

Back to the story line.

Hopefully by now we can agree that measuring GDP is tricky but it needs to be done.  The way it gets accomplished, as we learned above, is by a combination of direct measurement and extrapolation.  The "guessed at" parts we can rightly squint at due to our unfavorable experience with the infamous "Birth-Death" model by the BLS that only ever seems to record births for the purposes of over estimating job creation.  We might be forgiven for being skeptical of the other estimated parts we happen to know less about.

At any rate, here's the direct measurement part:

Most of the data for the annual estimates are from the Census Bureau’s annual surveys, which cover approximately 150,000 reporting units. Most of the data for quarterly estimates are from the Census Bureau’s monthly surveys, which cover approximately 35,500 reporting units.

Much of the data for the quarterly estimates is directly sampled from business units.  The questions asked boil down to, "how much stuff did you sell?" which means that what is being collected are revenue figures from thousands and thousands of businesses in each of hundreds of separate NIPA classifications (e.g. "automotive" is a high level NIPA classification, "automotive parts" is a subclassification, and so on).

As it turns out, for the first release of the quarterly GDP figure, roughly half of the data is sampled like this while the other half is extrapolated and approximated (see green circle below).  Later on we'll get a "preliminary estimate" by which time nearly 70% of the data's result will be derived from the surveyed data described above.

Table 2:  The first estimate of GDP for a quarter, the “advance” estimate, appears about one month after the end of the most recent quarter. Components of GDP based on information for which the Bureau of Economic Analysis has survey-based monthly data for all three months of the quarter account for about 45 percent of the advance estimate, as shown in Table 2. For other components, the bureau uses a mix of survey data and extrapolations. For example, the estimates of inventories are generally based on two months of Census Bureau survey data, and the estimates of exports and imports of goods are based on two months of Census Bureau compilations of customs documents of exports and imports. In each case, estimates for the third month of the quarter are extrapolations.  Many of the estimates of consumer spending on services are extrapolations for the quarter based on monthly trends and assorted indicator series, as mentioned in the introductory section. Components based on such trend extrapolations account for about 25 percent of the advance GDP estimate.

The table above helps you understand this language found in the GDP release where they are talking about the difference between advance and preliminary:

The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3). The "second" estimate for the second quarter, based on more complete data, will be released on August 27, 2009.

But there are two points to be made here.  The first is that much of the GDP is extrapolated, trended and otherwise subject to a lot of guesswork that we know, based on lots of experience with the monthly estimates from the BLS and Census  Dept., leave much to be desired in terms of believability.

The second thing is that because 70% of the final GDP comes directly from measurements of dollar volumes of corporate activity that there should be a rough alignment between corporate revenues and Personal Consumption Expenditures as explained pretty clearly here:

Consumer Spending For benchmark years, the final expenditures method used in the national accounts is based largely on business records.

The Bureau of Economic Analysis uses a “commodity-flow” method to develop estimates of the “best levels” for all final sales to consumers of goods and services by product category.

The commodityflow method starts with total sales (or shipments) by producers of final goods and services. Then, using this estimate of total sales, the bureau adds (a) transportation costs, (b) wholesale and retail trade margins, (c) sales taxes, and (d) imports. It then deducts (e) changes in inventories, (f) exports, (g) sales to business (because these are intermediate goods), and (h) sales to government. The method produces consistent estimates of the value of final sales to consumers and their allocation across product categories. 

So here again I will ask, how is it possible for business revenues to be down by some 15% while PCE is down by 2%?  As I stated before the answer lies in the extrapolated and guesstimated portions of the GDP report where a consistent and non-random positive bias lurks, unnoticed and unquestioned, in dozens of nooks and crannies.

Because of this, basing large scale, long-term investment decisions off of the GDP report is done at your peril.

Instead, the GDP report should be used only as a trending device, an instrument best geared to telling you if you are heading up or tilted down, not how high you are off the ground.

This is a companion discussion topic for the original entry at

 Thank you for this additional discussion.  I am still wondering about financial-product losses.  Are financial company losses picked up by GDP?  If a financial company incurs losses due to non-performing loans, is that picked up by GDP?  Obviously it would be picked up in S&P500 Revenues (so long as the bank was in the S&P500), but I am unclear as to how the government measures financial product losses/gains.  Are these consumer products?  If they are not included in GDP, it seems this may lead to a discrepancy, especially with how much a component of the economy financial companies have grown (or blown might be a better word) to be.  Of course that probably does not account for anywhere near the discrepancy, but it seems like it might be significant.  If financial products are not included in GDP, could it be useful compare GDP to (S&P500 - Financials)?

Great analysis! While I totally agree with you, I believe there is one more data point that will go further in confirming that the GDP data is unreliable:

What is the total primary energy consumption for the last quarter and how has it changed with respect to the previous quarter and year over year? Energy intensity of economy, i.e. ratio of GDP to energy consumption, is a relatively constant figure. A quick check on these numbers will be a great confirmation of your arguments.


Chris said:

"Instead, the GDP report should be used only as a trending device, an instrument best geared to telling you if you are heading up or tilted down, not how high you are off the ground."

More appropriately, take the decrease in PCE, as reported in the Grand Delusional Product report, divide it by the decrease in Business Revenues, round to the nearest whole number, and consider the result a preliminary estimate of the ratio of uncaptured to "captured" accountants that were involved in the "production" of the publically reported GDP results.

This is an interesting observation.  I’m not going to take the time to get the charts and all but look at Chevrons #‘s for the 2nd Q on a year over year basis.  If I remember correctly, their revenue was down almost 50% in comparison to the 2nd Q/08’.  That’s a HUGE difference in energy used/paid!

Hello Chris:
Super read! As I was packing yesturday I started to read this but ran short of time, so I printed it to a PDF and read it on the ferry.

But, now is the first time I have had to make a comment.

Yesturday morning while reading the blogs I was shocked that only a handful of them had mentions of GDP being off. I have to tell you I was elated to see your blog present this fine information. I am amazed at how very few bloggers and only a handful of investors and economists know enough to get behind the numbers. The better bloggers have the BLS unemployment adjusments and modeling down cold, I suppose in time GDP will be exposed for what it is isn’t.

Thanks again for yet another super read! Take care


 I posted this on the wrong blog, meant to put it here:

 The first half of this was priceless. The second half - well I'm at a total loss on how to describe - white noise comes to mind.

What really, really caught my attention was the inference of who cares about underlying numbers. Just buy. Is it me, or does that have a familiar ring to the housing and the tech bubble?


Check out Karl Denninger’s take here:

I believe energy consumption was cited as a reason to dis-believe China’s reported GDP numbers earlier this year.

Thanks for the link Davos.  I think Dennis Kneale just won the prize for being the only person on the planet even more annoying and useless than Cramer.

 Hello Patrick! 

BTW Chris’s fine work was mentioned on Nate’s site

Chris thanks for all that you do!

Off and On Topic:
Though I have read Admiral Rickover’s speech a dozen times during my lifetime (and heard accounts of it by the Admiral father of a longtime friend), it continues to say more to me each time I encounter it; it screamed at me tonight, in the audio format provided by Rick Lakin on The Energy Bulletin (

The perceived intellectual volume of the thoughts within had little to do with Lakin’s reading of it (Sorry Rick, you just don’t have talent in that area; perhaps Rickover didn’t either, as we are where we are (in our energy dependence) even though the man was obiously the most prescient person to have lived in the last ? centuries.) Would love to hear Samuel Jackson or Sam Elliot read it. Maybe one or both could activate the fight or flight response that seems so necessary to addressing our situation…

Thus I come to my point: We who cowtrail across the virgin territory of the blogosphere, just behind the original escapees from "the box," have been priviledged to encounter minds such as Max Keiser, Karl Denninger, Nouriel Roubini, Zerohedge, and Chris Martenson. And I would like to propose that these men–men, in this case–may be no less incredible than was Admiral Hyman G. Rickover.

I have to wonder what the reaction was to his speech that night: Were people baffled? Bored? Frightened? It’s really hard to come to any general conclusions about what the average reaction might have been amongst a group of physicians who were, no doubt, thinking physician–ly. Perhaps it went right over their heads, through two ears in a single utterance, or ricocheted off the glass of chardonnay that they rarely set down during the 45 minutes of the most insightful public proclamation ever made in the history of Man–in my opinion. There is evidence that nothing sank in, took root, raised the hair on the back of the neck, as,  here we are; unprepared.

And what of Max and Karl and Zerohedge and Chris? Are they our Admiral Rickovers? Are we just slightly behind them in our organizational skills and our confidence in our opinions–a confidence and organizational ability, that, were they sufficiently developed, would have allowed us to blog/website our ways into a history the stature of Admiral Rickover’s? Woulda’ Coulda’ Shoulda’

I, for one, no longer post numerical and logical rationalizations for my beliefs; I did that for ten years–to no avail. "Fool! Crank! Nutjob! Nasdaq 10,000!" I just rave like a lunatic now. But I’m glad a new bunch with better organizational skills and a much more refined insight have come along and allowed those of us who had–almost–given up on truth to have one more go at it.

I admire the Chris Martensons of the current Seeking of the Truth effort, and I would like to say that many of those who post here are–and might well have been, were you there that incredible night with Admiral Rickover, the only intelligent life left on planet Earth.

As a newly enrolled member, this is my first post here.  Great analysis.  How does the descrepancy between the percent change in PCE vs. corporate earnings from this most recent GPD compare with prevous GDPs?  I wonder if comparing the percentage change in PCE with percentage change in corporate revenues over the past several decades would be revealing.

I’ve read the speech. Only a soldier can be in such a warped mindset. USA have been squandering its vast natural wealth ever since exterminating the locals who had left all fossil energy intact for thousands of years, Now payback time cometh,

Here’s a direct link to the text:

Thanks for bring it up Headless. Very good read. This should be in the Essential Articles section.

Interesting how the father of nuclear power in the Navy was so honest in assessing its limitations. Also he makes the point about slave labor, which Chris uses to great effect in the Crash Course. But this is the point that spoke to me:


Fossil fuels resemble capital in the bank. A prudent and responsible parent will use his capital sparingly in order to pass on to his children as much as possible of his inheritance. A selfish and irresponsible parent will squander it in riotous living and care not one whit how his offspring will fare.


The desire to drill our way out of our current energy problem leaves that much less to future generations. We have squandered so much time and energy putting off fundamental changes to the way we live…


Very appropriate post and I appreciate your observations! 

I have been using the Rickover speech during the discussion period of the CC seminars I am doing and it relly hits home to the audience when they realize the problem we all face is not new news at all but rather an inability to act.


Your wish is my command!

Actually, Rickover’s speech has been in my Essential Articles section for quite a long time, pretty much since I assembled the page.  Check under "Peak Oil" and you’ll find it there.

I too found Rickover’s speech to be deeply moving both for its clarity and for the apparent lack of progress in official responses ever since.  Actually, that’s too kind…for the antiprogress of official responses ever since, is more like it.

Here’s how I introduce it on the Essential Article page:

In 1957 (not a typo), Admiral Hyman Rickover ("Father of the Nuclear Sub") delivered a speech that fully outlines the concept of Peak Oil and its implications. This is a brilliant and chillingly accurate summation of precisely what we are experiencing now, delivered 50 years ago. After reading this, it is no longer possible to cling to the belief that that Washington DC was somehow uninformed of the challenges.   Read this article.

Oops, Chris I should have looked. I read through most of the articles you had in there when I first joined (and learned a lot). I should have remembered that one. Anyway it was worth revisting, makes me want to review the books, articles, and other content of this site that I devoured when I first joined. Might rediscover some gems