Tuesday, February 11, 2014

Has GDP Been Contracting?

The deception with tact
Just what are you trying to say
--The Fixx

Since 1994, reported GDP has grown ~2.6% annually. The blue series on the graph below shows the annual percentage changes in reported GDP during this period.

The reported GDP number is sometimes referred to as 'real' GDP, meaning that it has been adjusted for price inflation. The 'headline' price inflation number, the CPI-U (consumer price index-urban), has increased ~2.4% annually since 1994. (The actual 'GDP deflator' has averaged less than this (2.0%) during this period, but that is a story for another day).

What if price inflation is under-reported? Suppose that it has been under-reported by 3% since 1994 (which may be conservative).

If true, then the 2.6% reported annual GDP increase over the last 20 yrs turns into 0.4% average annual decline. The red series on the above graph shows the annual percentage changes in GDP adjusted for 3% underreported price inflation. Viewed from this persepctive, changes in GDP over the past decade have largely been negative--meaning that output has been declining rather than advancing for the better part of ten years.

Test this proposition empirically. Has your cost of living been increasing greater than 2.4% per year? Is it easier or harder to make ends meet now compared to a few years ago?

If GDP has actually been declining rather than increasing, then conditions of general economic malaise are much easier to explain.

1 comment:

dgeorge12358 said...

There are two main drivers of asset class returns - inflation and growth.
~Ray Dalio