Today the GDP quarterly data was released showing a surprisingly strong 3.18% increase. Yet bond yields declined, implying the bond market thinks the economy is slowing down. Harald Malmgren on Twitter said the BEA used an inflation rate of 0.64% to calculate a “real” GDP of 3.18%. If the BEA used the CPI (done by the BLS) of 2.27% the GDP would be 1.56%. In my opinion one should use the PCE inflation index of 1.3%, less a 0.25% downward adjustment for errors in the contrived “Owner’s Equivalent Rent” housing cost index, making inflation 1.05%, some 0.4% higher than what was used to calculate GDP. If my method was used then real GDP would be 2.78%, lower than some of the 2018 quarters. A 2.78% rate is weak when associated with a huge pro-cyclical tax cut that started in 2018. Normally GDP should be 5.5% during a tax cut. Now that tax cut stimulus has been used up and no more will be offered thus consumers will gradually reduce their purchases in future quarters.
Dave Rosenberg said using only private sector activity, and x-inventories, and x-exports, then GDP would be 1%. Economically sensitive parts of GDP (consumer durables, cyclically sensitive, nondurables, business plant & equipment) contracted 2.1%, so a recession for cyclically spending has started. Real final sales to domestic producers were cut in half to 1.3%.
My opinion is that GDP is more accurate than unemployment because poor quality Gig economy pseudo-jobs warp the employment data. The critical flaw in calculating real GDP is if an artificially low inflation rate is used, which as the case this time!
The oil sanctions against Iran will drive oil costs higher, creating a slowdown in the U.S. economy. Since many people have chosen to accept a long commute, that uses too much gas, so as to get affordable housing, then higher oil prices will reduce consumption of other goods, leading recession.
Investors need independent financial advice about the risks of a hidden future decline of GDP that leads to a deep stock market crash.