Mike Shedlock

Every month Doug Short at Advisor Perspective writes an excellent report on GDP. With today's release of the Q1 GDP Second Estimate, Doug Short has a new column worth a good look: Will the "Real" GDP Please Stand Up? (The Deflator Makes Big a Difference).

How do you get from Nominal GDP to Real GDP? You subtract inflation. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, which is somewhat different from the BEA's deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics' inflation gauge, the Consumer Price Index.

The Lower the Deflator, the Higher the GDP

I have a note at the bottom showing the real GDP calculation method. Suffice to say that the higher the increase in compounded annual percentage change in the deflator, the lower the real GDP. Conversely the lower the increase (or if there is a decrease), the higher the real GDP.

GDP Four Ways

Doug Short calculates the GDP using four different deflators.

  1. GDP deflator (official number) : GDP +1.86, 10-Yr Moving Average +1.7
  2. PCE deflator (personal consumption expenditures) : GDP +1.13, 10-Yr Moving Average +1.6
  3. CPI deflator (consumer price index) : GDP +1.05, 10-Yr Moving Average +1.4
  4. Using John Williams' Shadowstat measure of inflation  : GDP -10.50, 10-Yr Moving Average -5.1

The first three charts are all similar looking but charts 2 or 3 seems more reasonable than the official numbers. Here are two of the charts.

Real GDP Using PCE

click on chart for sharper image

Shadowstats GDP

click on chart for sharper image

Doug Short Writes ...

Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.

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