Garbage In, Garbage Out

The National Accounts are becoming worthless because of political pandering

We totally understand that this is a hotly contested election year and both sides like to stretch the truth to score points. There are dishonest operatives in each camp, and we prefer to be genuinely data-dependent, or at least as much as any fallible humans can be.

But that’s becoming increasingly hard these days with unreliable economic data. If the figures in the National Accounts aren’t accurate, then being data dependent does you no good. It’s garbage in, garbage out.

That brings us to two recent revelations in the economic data, one “official” and the other proprietary.

On the official side, we have the recent benchmarking of gross domestic product (GDP) and gross domestic income (GDI). We’ve detailed before how the growing disparity between these two meant they’d have to converge either in revisions or with new data showing one increasing with the other decreasing. Furthermore, the lower GDI figure was likely much more accurate than the inflated GDP numbers. So, instead of GDI catching up, GDP was supposed to catch down.

But it didn’t. Instead, real (inflation-adjusted) GDP was revised up a shocking $300 billion (chained 2017 dollars) and real GDI exploded higher by $850 billion.

But where on earth did the Bureau of Economic Analysis magically find hundreds of billions of dollars in additional income? It wasn’t because they found new data that supported this conclusion. Instead, they found an excuse that got them to the conclusion they wanted.

The BEA essentially changed some of their models in order to fabricate hundreds of billions of dollars in additional savings. Thus, without any evidence to support these figures, the BEA made assumptions that gave them the outcome their political bosses in the White House wanted—the BEA is, after all, part of the executive branch.

It’s difficult to overstate how damaging these kinds of political moves are when they come from agencies upon which we rely for nonpolitical information. It’s one thing when the White House spokesman spins things (both parties do that) but it’s highly problematic when party apparatchiks distort the National Accounts.

Major decision makers, from Wall Street, to Congress, to the Federal Reserve, all rely on official government data. And it’s completely unreliable today.

To be fair, that lack of accuracy is not entirely nefarious. In the post-pandemic economy, some big holes have revealed themselves in the modeling work of government bean counters. The scandal here is not so much that these government employees are bad at their job (the DMV is emblematic of government efficiency), but that the problems have been evident since the Spring of 2022 and nothing has been done to address these issues.

Speaking of government employees, we also have to lay some of the blame on market participants who don’t bother reading newsletters like ours, and so don’t understand the products being produced by the government. The latest unemployment situation showed this in spades. People cheered the unemployment rate falling to 4.1% but it wasn’t because of private sector growth. It was because of government employees.

Almost 800,000 people in September started working for the government. If there hadn’t been that massive surge in government hiring, the unemployment rate wouldn’t have fallen to 4.1% but risen to 4.5%.

That’s a case of data being widely available and folks just not knowing where to look, or even what to look for.

But now we have to address the second recent revelation in the economics data—a study from the Brownstone Institute. The two authors (both economists) reevaluated the accuracy (inaccuracy?) of inflation metrics today and produced alternatives that better reflect real world data on price increases over the last five years. They then used these revised inflation figures to adjust GDP into real terms.

The authors identified three ways in which inflation metrics today are garbage-in-garbage-out. First, housing costs are imputed from rents and the price indices don’t even look at home prices or interest rates—a running complaint of ours, as long-time readers know. This has grossly understated housing price inflation since 2019.

Second, government bean counters often overstate the benefits of regulatory action in order to push through their ideologically driven executive branch overreach. That’s how we end up with dishwashers that don’t wash dishes and clothes washers that don’t wash clothes. Consumers regularly complain that these appliances need to be run twice in order to actually clean dishes and clothing.

And although the appliances are more expensive and the quality has declined, the statisticians count this as a win and often reduce the item’s price within a price index like the CPI or PCE chain-type price index.

Third, indirect purchases, like health insurances are notoriously hard to measure and rapidly changing economic conditions make this even more difficult. The authors dusted off an older methodology that seems to perform better in periods of faster inflation, like today, to once again provide more accurate results.

And those results are rather shocking.

It turns out the economy shrunk much more than previously estimated in 2022 and has never really recovered. We’re even below where we were at the start of 2019. So much of what we thought was economic activity has really just been inflation, according to this study.

If that seems unbelievable, consider that a majority of Americans believe we’re in recession, and that’s been the case for well over a year now. Maybe people feel terrible about the economy because it IS terrible.

That’s painfully evident when you look at the study’s estimates for disposable personal income, after adjusting for inflation using the author’s modified deflator. People simply have less purchasing power today than they did five years ago—no wonder everyone is hating on this economy.

It’s just another case of garbage in, garbage out. With so much unreliable data out there, you may be tempted to stick your head in the sand and say the heck with it all, but that’s throwing the baby out with the bathwater. It’s a lot of work to sift through the nonsense and figure out what makes sense, but it’s the only way to not fly blind today.

And sure, you don’t have time to comb through the barrage of public and proprietary data being released every day, but that’s why you have us. We’re here to find the kernels of truth in a sea of garbage—for the truth will be your life raft in economic storms. Cling to it and live; cling to the garbage and drown.