Economics is like Egypt

February 12, 2011

That is, it’s hard to know what’s going on. Here’s a view skeptical of the story of 3.2% growth in 4th QTR GDP.

This chart shows the yield on 10 year US government bonds. It takes off right around Jan 28, the release date of the GDP growth rate.

http://finance.yahoo.com/echarts?s=%5ETNX+Interactive#chart1:symbol=tnx;range=3m;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

This could be because investors think that good times are here again. So, they’re taking their money out of bonds and putting them into stocks. That’s one view. Another might be that they’re taking them out of bonds because they believe the value of bonds will fall due to rising inflation.

Speaking of inflation, take a more detailed look at the GDP figures:

http://www.briefing.com/Investor/Public/Calendars/EconomicReleases/gdp.htm

The GDP price deflator used in the GDP calculation was 0.3%. Really? Inflation was only 0.3% for the quarter? Let’s take a look at the CPI, which is calculated in a different manner:

Chart 2 in the BLS release below demonstrates that the ‘core’ CPI increased around 0.75%. The overall index, including food and energy, increased around 1.25%

http://www.bls.gov/news.release/pdf/cpi.pdf

Okay, first the idea of excluding food and energy from the index is that they are volatile and obscure the truth regarding inflation. But if you look at the chart you’ll see they haven’t been all that volatile over the past year. They have simply been higher. Since most of us eat and like to heat our homes. These are the prices we’re experiencing.

So, how do we reconcile a CPI of 1.25% and a GDP deflator of 0.3%? If the CPI is right I think that knocks a full point off of GDP growth. 2.2% doesn’t sound all that robust.

Which might explain why Gallup is reporting a 10.3% unemployment rate v the 9% the Federal government is reporting.

http://www.gallup.com/poll/125639/Gallup-Daily-Workforce.aspx

Perhaps, fears of inflation are overdone or, perhaps, the economy is really growing a lot. You wouldn’t know it from the foreclosures in the United States. What would the CPI be if housing (shelter in the link below) wasn’t growing very slowly? (0.4% over the past year)

http://www.bls.gov/news.release/cpi.nr0.htm

You may also note the 3.7% increase in the price of used cars. I’ve read speculation the inflation rate for these sorts of vehicles is high because the “cash for clunkers” program removed from service all sorts of perfectly serviceable vehicles. Speaking of Cash for Clunkers, I have an equally good idea to revive the economy. We’ll randomly destroy the houses of 1 out of 20 of the people who voted for Obama. Then we shall all grow rich rebuilding them.

If that doesn’t work, then I have this great idea to pay people to dig holes, and then pay other people to fill them up. Don’t worry about how we’ll pay for it. There are a lot of people who make over $250k a year.

Lots of numbers here. Like Egypt, you can find just about any story in there you want.

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