BEA Release, Fourth Quarter GDP Grew 6.9 Percent, or Did It?
The Bureau of Economic Analysis released the Fourth Quarter GDP (Q4) data today [DATA HERE], and the White House will likely spin a victory message. However, the real economic picture is covered by the continued storm of inflation.
Gross Domestic Product (GDP) is the dollar value of all goods and services produced in the economy, minus the dollar value of goods and services we import. The percentages discussed are percentages of change over time.
The fourth quarter result was an increase of 6.9 percent over the prior quarter.
The total U.S. economy is now estimated around $23 trillion annually. [Tables pdf Here]
What the GDP doesn’t show is the diminished purchasing value of the dollar and/or the actual rate of inflation which towers over the valuation. With goods and services costing much more, the estimated value of those goods and services (the amount of money spent on them) increases.
Because we are in a severe inflationary cycle, the resulting evaluations of the economy are skewed. The BEA attempts to remove the inflationary impact of their evaluations, but they do so by using a 5.5% inflationary rate, which is a much lower inflation estimate than actually exists.
Essentially, there is so much inflationary noise in the prices of goods and services, any calculations by the government are simply estimates of what they think the value of the underlying economic activity is worth. Bean counters are paid to count beans with rules on what each bean is worth. If the rules are wrong, the valuation result from the counters is wrong.
To give you an idea of how far these figures can be flawed, let me share an example of costs from a company and sector that touches all our lives.
DOW chemical is likely the one company in the world that generates more originating products and raw materials than any other. DOW touches your life and is likely the raw material provider for almost everything around you. DOW generates petroleum chemicals, plastics, rubber and solvents that are in virtually everything.
From cars, clothes and furniture to plastics, Styrofoam and containers, DOW is the originating manufacturer of almost all of it. Dow provides the originating material in the supply chain that is then carried forward into all levels of manufacturing.
One sentence from Dow is all you need to see to understand what the current rate of inflation is within the supply chain:
“Prices climbed 39% in the fourth quarter from a year earlier, while volumes fell 4%.” (link)
The cost of producing and processing the industrial products that Dow handles jumped 39%. Those massive increases in costs are at the very beginning of the supply chain. Those prices are then passed along to the next level of manufacturing, and then the next level of component creation, and then the next level of assembly, until a final product is created, sold, transported and delivered to the seller.
The beginning product, the raw material, starts with a 39% increase in price. That is the scale of origin level inflation that works its way through the system until it finally reaches us.
Notice, Dow also said the net volume of their product outputs “fell 4%.” So, they made less stuff at a much higher price.
Take that example and overlay it into the GDP consideration. Remember, the GDP isn’t a measure of the actual outputs of stuff created, the Bureau of Economic Analysis is only measuring the aggregate value of the stuff, ie. what it’s worth.
- 20 trillion units at $1.00 per unit equals $20 trillion dollars.
- 20 trillion units at $1.05 per unit equals $21 trillion dollars.
- An increase of 5% in economic valuation (GDP), but we haven’t created a single product more.
Did our economy expand at 6.9% in the fourth quarter? Or are we just seeing the increased valuation of goods and services, while the actual outputs in the economy are shrinking?
Did you pay 20% more at the grocery store and leave with 20% more food stuff? Or did you pay 20% more at the checkout and leave with the same or less food stuff than previous?
I think we all know the answer to those questions.
Checkbook economics is the only economics that matters.
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