Friday, January 28, 2011

The U.S. Consumer is Back: 4.4% Growth in 2010:Q4 Consumer Spending Is Highest in 5 Years

Boosted by the strongest quarterly growth in real consumer spending (4.4%) in almost five years (see top chart above), real GDP growth rose 3.2% in the fourth quarter of last year (see bottom chart).  The 2.9% real GDP growth for all of last year was the highest annual growth in real U.S. output since a 3.3% growth rate in 2006.

See news reports from the Wall Street Journal  ("U.S. GDP Growth Accelerates") and Washington Post ("Growth Strengthened to 3.2 pct in Q4 of 2010"). 


At 1/28/2011 9:23 AM, Blogger morganovich said...

2 points worth considering:

1. if CPI is being understated (and it is) then this number is being inflated. seriously, what is the likelihood that every other major economic area (eu, uk, brazil, china, ...) saw an uptick in inflation last year while we saw a decline? this number is just mistaking inflation for growth.

2. we're going to need to see the personal income numbers. i'll bet you they are not up anything like the amount that spending was. if the increase in spending is due to decreased savings, that's a much less sustainable situation that if it were due to increased income.

At 1/28/2011 9:25 AM, Blogger Mark J. Perry said...

The CPI is calculated by the BLS and is NOT used to calculate real GDP or its components. The GDP deflator is used by the BEA to adjust for inflation, not the CPI.

At 1/28/2011 9:28 AM, Blogger Junkyard_hawg1985 said...

This was a strong report. The weakness in the numbber was business inventories. Without the impact of business inventories, the economy grew at 7.1% in Q4! The nice thing about this is that this provides some pent up demand for future GDP growth.

I do agree with Morganovich that inflation is understated in the report. Also, some of this new growth we are seeing will start to show up as measured inflation (CPI) in the very near future.

At 1/28/2011 10:22 AM, Blogger morganovich said...


you have made that comment before, but the GDP deflator uses the same geometric and hedonic methodologies as the CPI, which is why the two vary so little.

this makes it prone to the same flaws and tendency to understate.

so, while you are correct that i should have said GDP deflator, my criticism remains valid regardless.

we in the US are pretending that inflation is decreasing while the rest of the world is seeing it tick up. it's not that our economy is different, it's that our methodology is bad.

this is leading to chronically bad monetary policy choices. isn't in interesting that since the change in inflation calculation, we have seen pretty much nonstop (to the point of concatenation) asset bubbles and busts?

what would drive such behavior apart from overly loose money? asset bubbles are to some extent inevitable, but i doubt there is any period in history where they have come so close together with the wreckage of one inflating the next.

to look at the prices of food, commodities, healthcare etc over the last 2 years and claim that there is no inflation (or that inflation is moderating) seems very questionable to me.

we have just defined it out of existence. but, like marking your car speedometer to say that 60 is 20, it may make us think we are not going fast, but will do nothing to alter the force of the crash.

At 1/28/2011 10:32 AM, Blogger Junkyard_hawg1985 said...

Based on Morganovich's and Mark's comments, I went back to look at the data.

I went to look at the current dollar and chained data in the GDP report. According to the report, current dollar GDP rose from $14.745 Trillion to $14.870T (+0.8498% or 3.4% annualized). Chained ("Real") GDP rose from $13.279T to $13.383T (+0.784% or 3.14% annualized). This means the inflation rate they assume in Q4 was 0.07% or 0.26% annualized.

By comparison, the CPI for September was 218.439 vs. 219.179 in December. This is an annualized inflation rate of 1.3%. In other words, this GDP report understates inflation by 1% relative to the consumer price index. Adjusting for the CPI (which Morganovich says is understating inflation), the GDP growth would only be 2.2% and consumer spending would only be up 3.4%. Now these numbers don't look as good as before. If the CPI is understaing inflation as Morganovich claims, then the GDP is just mistaking inflation for growth.

At 1/28/2011 10:50 AM, Blogger Buddy R Pacifico said...

Consumer spending drove half of GDP growth in Q4. The other half of Q4 growth was driven by Exports. Imports were down 13.6% and Exports were up 5.6%.

2011 is predicted to have tight inventory management, further deleveraging by the consumer and somewhat more disposable income. Export growth looks to be the main driver of GDP growth this year. The makeup of Exports is skewing to raw materials and ag so, inflation may give (controversial) assistance to GDP growth.

At 1/28/2011 10:54 AM, Blogger morganovich said...


my sentiments precisely.

both GDPD and CPI are set up (though changing the goods in the basket based on price movement or through geometric weighting) to ignore/underweight those goods that go up in price and favor those that decline.

this is how we wind up with healthcare being 1/16 of cpi, but 1/6 of gdp.

the erroneous underlying assumption is that when the price of a good goes up, people tend to substitute something else for it. while this makes cursory sense, when you really think about it, in many cases price goes up because demand and consumption are up, so this geometric assumption is not only wrong, but in many cases backwards.

if the price of wine goes up because of heavy demand due to positive articles about heart health, it should be overweighted in the basket due to higher consumption, not underweighted.

this is not to say that there is no substitution when the prices of a good rise, but such substitution would tend to bring the price of the initial good back down, leaving me with serious questions about the usefulness of the practice as it should already be included in the price signal in a supply constraint situation, but provides 180 degree wrong input in a demand increase situation (which is the more common price driver these days).

since the switch to geometrically weighted CPI in 1992, inflation has steadily declined, in direct contrast to what the "old" CPI would have read.

this result can be easily replicated by taking 100 goods of price 1 and fluctuating their prices randomly but with zero net change for the basket. retain the new prices and re-iterate this 50 times. applying arithmetic weighting, inflation is always zero. using geometric, you get accelerating deflation. the whole calculation is rigged to make disinflation (and eventual deflation) inevitable.

At 1/28/2011 12:02 PM, Blogger Benjamin Cole said...

Die recession, die, die, die.

Morgan: Forget about the CPI. The FOMC, in internal discussions, regards the CP as bloating true inflation.

If you seriously believe the USA CPI is overstating inflation for years on end, then you must conclude that the whole Euro continent has passed us by. Unless you think they are also lying about the their CPIs.

You get to the position where there is a global conspiracy to lie about CPIs, and living standards are falling everywhere.

You become laughable.

At 1/28/2011 12:33 PM, Blogger morganovich said...


as ever, you display zero grasp of the subject matter and once more cite the report that no one outside of the fed and bls believes.

there is not a global conspiracy, it's a US issue (and yes, they are deliberately lying for policy reasons). (though the euros also use geometric weighting, so they have the same problem)

far from being a conspiracy, it's just governments all over the world finding the same convenient lie to tell to try to rein in out of control entitlement spending. do you really find it so difficult to believe that governments would chose to understate inflation in order to lessen their social program burdens which are indexed to inflation? do you find it hard to believe that one western government would imitate another when they found a way to do this?

it's not a "conspiracy" when people respond to incentives in predictable ways.

the rest of the world saw inflation rise last year while we claim ours fell (with GDPD dropping 70% to near zero).

so riddle me this oh bubble baby, why is US inflation behaving differently that every other major economic region? the EU, UK, china, brazil, etc all saw inflation go up.

geometric weighting results in deflation in a basket of constant price. try it yourself. take a basket of 100 goods and fluctuate their prices randomly but with zero net change. retain the new prices and reiterate. do this 50 times. apply geometric weighting. you will get significant deflation. it becomes even more pronounced if you assume that the prices of goods that decline are more likely to decline in the future.

this is how we get health care as 1/16 of CPI and 1/6 of GDP.

geometric weighting assumes that all price increases are caused by the supply side, a ludicrous assertion in the US economy. most price increases are caused by an increase in demand. that means that a product should not be underweighted, but rather, overweighted. this means that the current methodology will consistently result in a net change in consumption that has the wrong sign on every good whose price is driven by increased demand making it a small wonder that it is so ineffective.

the US had very little real growth from 2000-2010. most of it was inflation that we mistook for real output. this is why unemployment never came back down to 2000 levels and has been so persistent in the last 3 years. if you take out the jobs created by the housing bubble, it looks even worse.

At 1/28/2011 3:24 PM, Blogger Junkyard_hawg1985 said...

MCF, Great Summary.

To try to get some additional inflation data, I went to the billion prices project (HT: Mark Perry of the Carpe Diem Blog). According to the BPP, inflation in 2010 was 2.53%. According to the CPI, it was 1.14%. Backcalculating the difference between chained GDP and nominal GDP, the BEA used 1.36% inflation in 2010. The difference in chained GDP in 4Q10 vs. 4Q09 was 2.79%. If the real inflation rate was 2.53%, then the real GDP only increased by 1.6% in 2010. This rate of growth is consistent with the employment data for the year.

Here is the link to the BPP:

At 1/28/2011 4:09 PM, Blogger morganovich said...


that's well thought out. (for some reason google logged me in as MCF no morganovich, but i'm the same guy)

i think we've talked about this before, but to get a good look at just how much impact the shift in CPI calc had, take a look at this chart:

john calculated CPI using the old BLS methodology (arithmetic weighting and no hedonics). as can re readily seen, the two series diverge from 1992 (the big change) with the old metric trending up and the new one trending down (which is the inevitable consequence of the geometric weighting).

worth noting is that this change was not applied backwards, so the historical (pre 1992) data is still calculated the old way and a comparison across 1992 is apples to oranges.

using the current methodology, inflation in 1974 was sub 2%.

this seems to be the key breakdown of the argument that proponents of the current system use. if you argue that there is no inflation now, then you have to accept that on an apples to apples basis, that means that there was very little inflation in the 70's, and argument that few are willing to make.

the data will not support an argument that the 70's were high inflation and the current period is not. if you use similar methodology in both cases, current inflation looks like 1973.


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