Bill King: The folly of government statistics

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This post is a guest contribution by Bill King*, well-respected and straight-talking author of The King Report.

Most of the Street heralded the 1% decline in Q2 GDP because it was 0.5% better than consensus – even though the US government admitted in the release that its GDP estimates over the past several years were consistently wrong! So why should the latest report be any more accurate?!?!

We feel compelled to address the scheme of past-month lower revisions producing better-than-expected m/m or q/q results, even though the aggregate metric is worse than expected. We have incessantly noted and commented on this scam but most of the trading and investing universe omits it.

We will again utilize basic math to illustrate the scam. If Q4 ’08 GDP was 100 units, and Q1 ’09 was reported at -5.5% and Q2 ’09 GDP was expected to be -1.5%, the expectation was for GDP of 100 units minus 5.5% or 94.5 units, minus 1.5% or 93.08 units.

With the revision of Q1 ’09 GDP to -6.4% the Q1 GDP units become 100 minus 6.4% or 93.6 units. So Q2 is minus 1% or 92.664. Ergo aggregate GDP was worse than expected!!

As we warned, lower imports, a sign of economic weakness, contributed a net 1.4% to GDP.

Once again bean counters “fooled” with inflation to produce higher GDP than warranted.

John Williams (Shadow Government Statistics) said: “The relatively narrower quarterly contraction in the second quarter reflected the impact of greater weakness being thrown back into the first quarter, in revision, and the use of artificially reduced inflation. The implicit price deflator for the second quarter was 0.2% versus a revised 1.9% (was 2.8%) in the first quarter.”

Last week we complained that despite records in fiscal stimulus, Fed largesse, nationalization and rigging of markets the best that can be said is the pace of economic decline is slowing.

Despite a 10.9% surge in federal government spending and virtually no inflation adjustment, all that bean counters could fabricate (June data are still incomplete) is a 1% “official” decline in GDP.

The GDP report last Friday evinces the folly of US government economic statistics and Wall Street consensus analysis.

Source: Bill King, The King Report, August 3, 2009.

* Bill King is market strategist with Chicago-based broker-dealer M. Ramsey King Securities. He has over 30 years’ equity trading and management experience with major Wall Street firms including Nikko Securities International, E F Hutton, Nomura Securities International, Dean Witter, and Jeffries and Co. To subscribe to The King Report, e-mail Bill at billking@ramkingsec.com.

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