The Commerce Department released its annualized figures for second quarter 2020 GDP today claiming that on this basis the economy shrank by a seasonally adjusted -32.9%. As reported by CNBC:
“Sharp contractions in personal consumption, exports, inventories, investment and spending by state and local governments converged to bring down GDP, which is the combined tally of all goods and services produced during the period.’
“Personal consumption, which historically has accounted for about two-thirds of all activity in the U.S., subtracted 25% from the Q2 total, with services accounting for nearly all that drop.’
“Spending slid in health care and goods such as clothing and footwear. Inventory investment drops were led by motor vehicle dealers, while equipment spending and new family housing took hits when it came to investment.’
“Prices for domestic purchases, a key inflation indicator, fell 1.5% for the period, compared with a 1.4% increase in the first quarter when GDP fell 5%, The personal consumption expenditures price index dropped 1.9% after rising a tepid 1.3% in Q1. Excluding food and energy, the “core” PCE prices were off 1.1%.’
“However, personal income soared, thanks in large part to government transfer payments associated with the coronavorus pandemic. Current-dollar personal income rose more than six-fold to $1.39 trillion, while disposable personal income shot up 42.1% to $1.53 trillion.’
“Despite the rise, personal outlays tumbled by $1.57 trillion, due in large part to a drop in services spending.’
“Imports added 10% to the total, offsetting the 9.4% pull from exports.’
The fact that the average for Q1 and Q2 PCE comes out to a -0.3 in my mind signals a bout of deflation (falling prices and wages) that will be difficult to overcome, all this occurring despite massive ‘money invention’ and fiscal stimulus by the Federal Reserve and government. Neither of which have stopped pumping liquidity into the system since this fall began. Indeed there has been much anecdotal evidence of wage decreases and freezes across the country over the last few months.
The fact though that all these figures are seasonally adjusted gives me some pause given that this technique is essentially used to, in the dry tenor of statisticians’ parlance, “smooth out” these figures. This is done by creating long run averages of data and comparing present data to both past and once enough time has passed post-dated economic patterns to come up with an average rate of change. This is essentially a new trend line to which all data of the same type is compared. I won’t get into it all here but suffice it to say this leaves figures open to substantial manipulation which makes these figures unreliable.
Indeed a separate real time measure of GDP collated by the New York Federal Reserve which updates estimates for economic activity on a weekly basis (the Weekly Economic Index, WEI) has GDP shrinking at a much quicker pace from April through June of this year. This has GDP falling by -10.05% on a quarter over quarter basis in the same period. This annualizes to a rate of decline in GDP of about -40.2% not -32.9%. Though I’m not sure if this date is also seasonally adjusted, in which case things might be conceivably worse. Feel free to scrutinize the info yourself. www.newyorkfed.org/research/policy/weekly-economic-index#/