Deconstructing the GDP Data

There’s an interesting debate going on regarding the latest GDP report. The government’s initial estimate for second-quarter GDP growth showed that the economy expanding by 1.9%. The part that has that pessimists laughing is that measly 1.1% number for inflation. Inflation, of course, as measured by the CPI is running at a much higher rate, and would most likely push GDP growth into negative territory.
The issue centers around imports prices. Brian Westbury writes:

If import prices are added back into inflation, then the total dollar volume of imports must be added back into nominal GDP as well. This is the only way to compare apples to apples. Adding back imports pushes nominal GDP growth to 5.5% at an annual rate in Q2. Then, using the 4% inflation data (that includes import prices) means real GDP growth was still positive by 1.5%, or so.
A second issue to think about is that unlike the Consumer Price Index (CPI) – which attempts to measure changes in the cost of the things we buy – GDP inflation is designed to measure changes in the prices of the things we produce, regardless of whether the purchasers are foreign or domestic. Due to oil, prices for the items Americans buy have been increasing much more rapidly than the items they produce. As a result, GDP inflation looks artificially low, when in reality it is not comparable to the CPI.

Posted by on August 5th, 2008 at 9:34 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.