How Real is GDP?

It’s a good-news day for the economy. “The U.S. economy grew at blistering 3.3% pace in Q4 while inflation pulled back,” said one headline. The only problem with that was the headline probably should have said “The U.S. economy grew at blistering 3.3% pace in Q4 BECAUSE inflation pulled back.” And the problem with that is that inflation didn’t actually pull back. It increased as I’ve shown in several articles.

Even with the actual increases in recent months, inflation would have increased much more if not for the most extraordinarily over-manipulated number in inflation history—that massive healthcare insurance reduction that took medical insurance costs in dollar value all the way back to 2018 as if that ever actually happened. Did any one of you notice that you health insurance hasn’t actually increased at all in five years? This “reconciliation for past errors” benefited the CPI numbers through most of 2023, but it was never a real thing. It was an adjustment—and elephant-sized tweak to correct past BLS errors.

I wrote all about that in an earlier Deeper Dive: “The Great CPI Lie Exposed” in which I quoted Wolf Richter saying that the massive adjustment was “chicken shit.” Not his usual language. He was so incensed about it it he said:

All supervisory employees and top-level management at the BLS who had anything to do with the health insurance CPI since 2020, the people that tolerated the old version for so long and that approved the tweaks of the new version, should be fired. This kind of fiasco should be a career-ender for higher-level folks at the BLS.

So, that’s what we’re working with here, Folks. You see, “Real” GDP grew at 3.3% because it wasn’t made actually real. We now need to add qualifiers like “actually” before once-solid words like “real” to let people know whether we are talking real “real GDP” or fake “real GDP.” We’re talking in today’s report about fake real GDP that did not have enough inflation taken out of it to show what really happened in US production last quarter. Some of what we are measuring is still just a change due to inflation, not due to improving production. On top of that, if housing costs were calculated honestly, instead of by the best guess of rental value by uninformed homeowners, inflation would be higher still, which would make real “real GDP” lower still.

That said, I don’t know if real “real GDP” would have gone negative into recession this last quarter, and I’ve said it probably wouldn’t do that in the lead-up to this report in weeks gone by, especially as we start an election year; but I do know that inflation is rising, and there is plenty in today’s news about why it is going to rise much more noticeably in the present quarter, and I do know that we’re in a manufacturing recession. We’ve already seen that the Philly Fed, the New York Fed and the Richmond Fed have all reported a continuing long string of negative (recessionary) numbers for manufacturing. Now today, we can add the Chicago Fed as giving another repeated report of declining manufacturing.

I’ll look into whether there are other factors that make Biden’s latest GDP report a flawed positive and report what I find, if anything, in my weekend Deeper Dive for paying subscribers. It goes without saying, though, that Treasury Secretary Janet Yellen blew Biden’s horn for him, boasting of how today’s GDP report proves Biden has done what many thought was impossible (in itself, a good indication the numbers are impossibly jacked up).

“Though some forecasters thought a recession last year was inevitable, President [Joe] Biden and I did not,” Yellen said in a visit to the Economic Club of Chicago. “Instead of contracting, the economy has continued to grow, driven by American workers and President Biden’s economic strategy….”

The indicators are evidence of “the fairest recovery on record,” said Yellen, adding that the U.S. has “avoided financial pain for most middle-class American families” due to a strong post-pandemic recovery with faster relief from inflation than comparable countries.

Well, what more could you hope for in a presidential election year? Hopefully, you noticed the avoidance of financial pain a la the Biden & Yellen team. Just remember Janet is the clown who pronounced a few months before Covid that we had seen the last economic crisis in her lifetime. Apparently, she expected to be one of the first to die from Covid.

What I do know is that, any help from lower inflation numbers not knocking real GDP down by much is rapidly drifting away. Today’s headlines underline the now clearly inflationary impact I’ve said we would see from the first days of Houthi attacks in and around the Red Sea.

• Red Sea Blockage Leads To "Out Of Control" Shipping Rates; Charters Hits $100,000 Per Day

• Oil Rises to 8-Week High as U.S. Stocks Decline and Red Sea Tensions Increase

• U.S. Drivers Waiting For Lower Gasoline Prices Instead Told To “Buckle Up”

I noted yesterday that it seemed odd one person interviewed in one article said that it was a good thing the Red Sea crisis hadn’t hit oil yet. I said that, if it hadn’t hit a tanker ship, it had certainly hit shipping. I wanted to say that it had already struck an oil tanker, but I couldn’t remember when. One of the stories today notes when an oil tanker was hit by the Houthis back in December.

The biggest relief in headline inflation has been from energy. That is now fading away like a mirage on the sea.