GDP Report is Just Plain Wrong

This blog post is an example of the daily writing I do for enrolled members in the In Session forum area.  I wanted to get this one out to everyone because it deserves to be widely read and discussed.  If you are interested in reading and discussing news in real-time, I invite you to consider enrolling.

GDP:  More fuzzy numbers

The GDP report was released this morning and it was a compendium of incomprehensible and illogical numbers and, worse, it is just plain wrong.

Of course, since so much rides on an accurate assessment of our true economic state of affairs, it behooves us to make sense of it as best we can, understanding that the GDP report is less than perfect and riddled with difficult-to-rationalize statistical manipulations and quirky additions.

For example, the imputed value of "owner occupied housing" is a non-cash 'addition' to GDP meant to capture the value that people derive from their houses, due to the fact that they own them and do not pay rent to themselves in order to live there.  If this does not make sense to you, that means you are normal.

So we gamely march off into the most current GDP report, which came out this morning (Friday, July 31, 2009), mostly to expose just how wrong it is.

First, I want to reveal how I look at data. It comes in three buckets for me. From the most recent Martenson Report:

As I tell people in my seminars, I divide my data (or facts) into three buckets: good, murky, and unreliable.

Into the good bucket I put all sources of data fitting the following important criteria: The data itself is not statistically massaged before release, it is not 'sampled' but rather tallied up in its entirety, and it squares up nicely with other good sources of data.

Good Data

  • Sales tax data
  • Income tax data
  • Truck tonnage moved
  • Port shipping container traffic
  • Air transport
  • UPS, FedEx, and other major shippers' volume
  • Corporate Revenues (just added to list)

Into a bucket of lesser importance goes the murky data. This data is based on sampling, usually conducted by self-interested parties (National Association of Realtors data for example), or is seasonally or statistically adjusted, and/or does not square up with other, better data.

Murky Data

  • NAR home sales data
  • Continuing claims
  • Retail sales data
  • Trade deficit reports
  • Corporate Income (just added to list)

Into the final bucket goes the utterly unreliable 'data,' so bad that I need to use quotes around it. This 'data' is modeled or otherwise manufactured out of thin air with no accountability, does not square up (at all) with good sources of data, has massive errors in methodology that have never been explained, consists of survey data for reasons covered in an earlier Martenson Report (Survey Says...), is self-referential (e.g. LEI or 'leading indicator' data), and/or has been proven repeatedly in the past to be consistently biased for political or self-serving gain.

Unreliable Data

  • New home sales data
  • Employment data (due to the Birth-Death model)
  • All survey data
  • Leading indicator data
  • GDP (just added to list)

I realize now that I goofed in that report and left out of the largest and most unreliable source of data from that final list.  And that is the GDP report itself.  So I have added it here.

Also, into the "good" bucket, I have now included corporate revenues, because, unlike a corporate earnings statement (now in the murky bucket), there are many fewer games and shenanigans that can be played with revenue. Apart from sliding revenue forwards and backwards a quarter or two, it is relatively pure data.  GAAP accounting assures as much.

Added up across all companies, revenue provides a nice, clean picture of where things are going.  Perhaps the best we have.

Here's the most recent picture of that (found here) :

What we see here is a comprehensive enough sample for ALL companies in the S&P 500 that we can use it as a reliable measure of revenue across the entire corporate landscape.  We find that revenues are down more than -15% in Q2 2009, compared to 2Q 2008.

Now, if you think about it, when people buy (or consume) anything, that transaction passes through a company somewhere, somehow. So we might use this -15% decline in corporate revenue as a pretty good approximation of how much less stuff is being consumed this year, compared to last year.

Okay, now let's look at the GDP report.

I am going to avoid all of the massive complexity that normally accompanies discussions of the GDP report and go for the simplest possible illustration of just how spectacularly off-base and misleading it is.

On TeeVee, and from a raft of well-meaning experts, you will hear explanations for why this GDP report makes sense.  They will trot out things like increase in government expenditures, falling imports, inventory builds, and all the rest.  But we can skip all that and simply look at one thing.

The formula for calculating the GDP is shown below.

All I want to focus on here is just one component, circled in green above:  consumer spending, which represents over 70% of the economy.  Given this prominence, and taking our argument that there must be some proportional relationship between consumer spending and corporate revenues, we need look no further than this one simple measure to determine that something is seriously out of whack in the GDP report.

From today's GDP release, we get these numbers for the total GDP, along with something called "PCE" which stands for Personal Consumption Expenditures (i.e. "Consumer Spending" in the formula above):

Going from the very peak of the economy in QIII of 08, we can see that the BEA reports that GDP and PCE have only dropped by 2.7% and 2.3%, respectively.


PCE is only down -2.3% from peak? With corporate revenues in total down more than 15%? How does that work?

Is there some way to explain how people are consuming away, but doing so without spending money on products and services offered by companies? How do we explain a 15% drop in the solid, reliable corporate revenue numbers but a 2.3% drop in Personal Consumption Expenditures?

I really can't think of any possible explanation that makes sense.  And so I have to defer to the more reliable and trustworthy of the two numbers; corporate revenues.

Of course, comparing from the peak to current is not exactly what we should be doing, because that is comparing a QIII to QII drop in PCE to a QII to QII drop in corporate revenues.

When we ask the question, "How much have GDP and PCE dropped between QII 08 and QII 09?" we get these results:


Well, there, that certainly makes me feel better!

Just kidding.

This means we are being asked by the Bureau of Economic Analysis (BEA) to accept a reported -2% drop in PCE and a decline in corporate revenue of -15% , a figure more than seven times larger.

Of course, the discrepancy between the two cannot be reconciled. It is impossible. One must accept one or the other. 

I will point out that a -15% decline in corporate revenues is also in alignment with sales tax data from the states (down some 10% yr/yr), unemployment (9.5% and climbing) and many other economic measures.  I will recall here that good data is that which aligns with other data.

How is such a misleading GDP report created? (Hint: think sausages)

The answer lies in a disturbing mixture of seasonal and hedonic adjustments, imputations and other statistical wizardry not subject to review or insight. We are asked to simply accept the results without question.  Disturbingly,  the Wall Street/MSM (Main Stream Media) spin-machine runs off with the GDP report as though it were the sacred truth itself, as we can see in this series of headlines I captured off of Google shortly after the release.

The triple combination of stocks up(!), bonds up(!), and gold down(!) constitutes a "win-win-win" for government statisticians/politicians and the Federal Reserve, because such a result means that their efforts are being taken "the right way" by the markets.

Such a trifecta constitutes a vote of confidence in their suite of actions generally, and in paper wealth specifically.

Of course, curious minds might be interested in learning how such articles manage to come out within mere minutes of the GDP release, almost as if they were pre-written.

If they are (as many suspect), then this implies that the "market responses," as well, were already known in advance, implying that they are as fake as the report itself.

In the scheme of things, one might question whether a country that routinely lies to itself, and then accepts those lies, then reprints those lies, and ignores the obvious discrepancies, is really on a sustainable path to recovery, complete with green shoots, or whether it is merely leading itself astray.

But if one is like me, then no wondering is involved.  Such self-deception is viewed as a prescription for failure.

This is a companion discussion topic for the original entry at

GREAT post Chris! Do you have a calculation of a more accurate GDP using the corporate revenue numbers?

p.s. …compendium…great word! 

Notice how financials are up 22% YOY on rev. I wonder how much of that is attributed to mark to model accounting and MBS that are nonperforming but that banks state are still performing loans lol

A great breakdown of the GDP figures, you must be feeling vindicated by the subsequent move on Gold and Dollar today. Stocks are still holding on though, I can’t help feeling something big is going to happen before we reach 1000 S&P or 10,000 Dow.


Spot on! And taking bigger and bigger risks (GS’s VaR up to $254m from $184m last May, despite the fact that banking regulations should be making them REDUCE this level!).


I was wondering if 70% of GDP continues to be from consumer spending.  This number is from the old economy.  The new economy consists of much more government spending.  What percentage is today’s consumer spending?  What is the government spending percentage? 

Just seen this on Karl Denninger’s Market Ticker.


Just when you think you have lost all faith in the U.S. government, you realize that faith, too, like GDP growth, can have a negative sign in front of it.
I am sick and *%&^ing tired of these crooks that have taken over our government! And, unfortunately, there are probably so many skeletons in so many closets that, between "I won’t out you if you don’t out me,"  "We’re in this together," and "I go to jail, you’re going too," there is apparently no way to stop this from completely destroying America. If there aren’t skeletons in most of those closets (which Geithner et al proved is an unlikely assumption), how else could 99% of American citizens be against TARP I and yet it passes handily? How else can you explain that? 

What we need is a little reality TV of Bubba and Bernie (Madoff) to be piped onto the senate and house floors, then just watch for who seems nervous–better yet and easier to count, who is not frightened by the sight of their new lover.

Good question.  We can answer it from within the blog post itself.

GDP = $14,149

PCE = $9,989

PCE/GDP = 70.6%

So, yes, personal consumption is still over 70% of the ‘economy’.  Barely, but still over.

That, at least, is the perspective of the GDP report.  Some argue that the GDP report overcounts PCE and undercounts government spending and I think that’s the true substance of your question.  Considering the total summation of all government taxes including income, property, use, excise, and sales taxes we get a number that differs significantly from the GDP report.  Perhaps that should be looked into…




Excellent graph and article. Part of it pasted here for my comment.


Here’s the truth on GDP, in pictures:



The second derivative will not go positive until the slope of that line turns upward and we will not see an actual y/o/y increase until (of course) the line goes over zero.  So long as the line slopes downward the decline in GDP - the economy as a whole - is accelerating.




I think he must mean the First derivative. The first derivative will be positive when the graph turns up. The Second derivative is already positive since 2008 Q3 to 2009 Q2 the graph is concave up. Aside from this- the point of the article is that the GDP data says we are still in deep stuff and it is getting worse.


P. S. I bought some DIA puts yesterday when the pundits said everything was really getting good.


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 coroprations 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 cust the most       

 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.

Thank you. I am sad. I am sad how much people are mislead by our own great country and the media. I’m sad we don’t have people like you as our leaders. I’m sad of what we have become. My state raised meal taxes today 1%. Not sure why they stopped and didn’t just raise them 10% or 20% because no one can do a thing about it or seem to even care.

Only when people can’t get food is when we will care and will change, by then the country will be destroyed. Peak everything is on my mind and that is very sad.

I think he does mean the 2nd derivative.  Notice that the graph is YOY change in GDP, not GDP itself.  So it already is the first derivative of GDP.  As long as the YOY change decreases each quarter (as it does in this chart), the second derivative is negative.  It will not be positive until the YOY change is greater one quarter than it was the previous.  On the other hand, the 2nd derivative of the quarter to quarter change in GDP is now positive since the rate of decrease was less this quarter than last - at least if you take the official figures at face value.


Right you are. Since the graph shown is the change in GDP the first derivative of the graph will be the 2nd deriv. of GDP. When I looked at it the first time I thought he was talking about the 2nd derivative of the displayed graph.




Karl’s breakdown of GDP is clear as well.


Love the other work on the site, but I have to disagree with any attempt to equate US corporate revenues with US GDP.  That would be "Just Plain Wrong".
US corporate revenues are consolidated numbers and will include the revenues of their overseas subsidiaries (eg the revenues of McDonalds French subsidiary, or the revenues of Corning’s Asian operations).  The revenues of McDonalds French subsidiary are neither US income nor US exports and have nothing whatsoever to do with US GDP, but will reflected in French GDP.

If one returns to the reproduction of the screen showing that corporate revenues are down by 15%, the first and largest fall is that attributable to energy.  If Exxon pulls oil out of the ground in Saudi or Canada, and sells it to Europe through its Esso chain, then that is a nothing for US GDP.  The two biggest revenue fallers on the screen, energy and materials, are classic examples of where of ownership and management may reside in the US, but little that will be US income or US expenditure.  Because of the fall in the underlying prices of commodities such as oil and aluminum, those corporate revenues are well down, but it does not much affect US GDP, but more Canadian or Russian GDP.

Now, I am saying that there is no story here, just that your methodology is flawed. 

It would be interesting to track US only revenues for those same corporates (which they do disclose). 

This graph shows GDP vs GDP minus government spending from Q1’96 to Q2’09.


Edit: What’s the trick to show the graph in the blog? thanks.






I didn’t say revenues/PCE should be precise, only that there should be some approximate and predictable relation between the two.  Your point is valid to a degree.
For your position to be a dominant factor, foreign revenues/operations would have to be a lot larger than they are as a proportion of total US revenues, or they would have to account for the vast majority of the declines (i.e. US revenue held up but all the losses were in the foreign divisions).  So far as I know it, this is not the case.  The last I read, and it was a while ago, revenues from foreign sales constitute about one-tenth of total US corporate revenues.  If you have newer or better data, I would welcome your sources.

This is an example of the detail we can quickly swirl down into but I am not sure it helps us understand the issue more quickly or any better.

I have found, in this fast-paced and ever-more-complicated world, that backing up and using a wide angle lens offers enough resolution to draw conclusions and make decisions.


Fair enough points Chris.

Will look into some details and report back.

Interesting chart idea, but the chart itself seems off to me.  
How can the red line, representing GDP after government spending has been subtracted, be above the blue line representing GDP itself?

In order for the red line to get above the blue line wouldn’t government spending have to have been negative  (GDP-(-GVT SPEND)) so that when it was subtracted it added to the GDP reading?

Government spending is a large and positive number that actaully increases across the entire time series charted. 

Any ideas?