Government Statistics: Lessons in Cooking and Spinning
By: Richard Benson, SFGroup
June 12, 2003
A government is no different in behavior than any corporation in its desire to show the best possible
report. For a corporation, there is a bias in reporting high revenues and earnings. For government
statistics, it certainly makes the US appear healthier if the GDP is bigger, personal income is higher, and
the number of people working is greater. However, when accounting games are used to push up reported
numbers that reach a certain level beyond reality, a false sense of security can lead to very bad decisions,
both for individuals and the government.
If you are curious about seeing some "jaw dropping" numbers on the economy, take a look at Table 8.21
of the Bureau of Economic Analysis, titled "Imputations in the National Income and Product Accounts"
(since the latest data that is available is for 2001, linear trends can be used to estimate current numbers).
Right off, you'll notice that if total GDP is about $11.5 Trillion, at least $1.7 Trillion of GDP is "imputed."
What is an imputation, and why should we care? Imputations are the part of GDP that the government
decides to estimate, where no cash changed hands, kind of like we "scratched each other's backs."
Wouldn't it be a tragedy if this type of activity wasn't counted as REAL GDP? Some of the largest
numbers are for items such as $300 billion of Personal Income, imputed for the value of having a
checking account (free of charge); $680 billion for the value of owner occupied housing (you should really
be paying yourself rent), and $65 billion for the benefit people get from using the property of nonprofit
institutions, like going to a church or having a place to hang out during the day. We believe the $300 billion
for the value of checking accounts doesn't even pass the laugh test. Perhaps there was value back in the
1950's when it was expensive to clear checks and a case could be made for some measure of value.
But, in today's world, just try and bounce a check, use your ATM card in Europe, or pay your credit card
one day late.
Banks charge fees in the hundreds of billions of dollars, in real cash. To boost Personal Income by $300
billion (where no cash changes hands) because banks don't charge you enough for the privilege of living
off your float, is a joke! Even when you have deposited a check into your account, and the bank has good
funds, they can easily take up to a week or two to clear those funds for use. Banks are so friendly!
Why do these imputations really matter? Our economy has become a debt driven economy. Consumers
routinely spend 10% more than they make each year by taking on more debt. Debt service and debt total
levels are at record highs. However, debt can only be serviced with cash flow. With imputations there is
no cash flow. While GDP might be $11.5 Trillion, the cash economy is less than $10 Trillion. The reality is
that we have 15% less cash flow to service debt than we think. If corporations "goosed" their revenues
because they could use "imputed revenues," the management would go to jail.
The implications of the data for Personal Income and Personal Saving are even worse! Not only is
Personal Income overstated by $300 billion due to imputations for checking accounts, but total
imputations in Personal Income total over $720 billion. The total includes such items as $90+ billion for
owner occupied housing, and $350 billion of heath and life insurance paid for by corporations. While these
have value, the individuals never touch the cash!
The Personal Savings rate comes right out of "Alice and Wonderland." First, we have the mythical $300
billion in "non-charged bank fees," and the non-cash $90 billion in the rent home owners don't charge
themselves, pushing up personal savings. Then the government estimates the value on new home
construction, less housing depreciation, which adds about $300 billion a year. Just taking out the
imputations on housing for new construction less depreciation, swings the personal savings number from
over a plus $300 billion to a minus $100 billion. If you take out the $300 billion in "non-charged bank fees,"
personal savings is running a negative $400 billion a year.
The strangest thing is that housing is even part of "savings." The very concept of savings brings up the
vision of an individual earning cash that they take to the bank and deposit in a savings account. If you look
at Personal Income figures, the consumer is saving over 4% in the first quarter of 2003. If you look at the
Flow of Funds data, even with this 4% rate of savings, household wealth declined. Obviously, something
is rotten in the numbers. Because the US is in a massive housing bubble, flowing through the rising prices
of homes directly into the calculation for savings makes the reported savings number look positive when it
is actually negative (the Flow of Funds data just published by the Federal Reserve shows that Household
wealth declined in the first quarter of 2003).
Why does this all matter? Looking at our analogy of a corporation with revenues and earnings, the farther
away from cash the accounting becomes, the harder it is to decide if the firm is actually solvent or really
profitable. The more revenues that have not yet been turned into cash, the less real profits are. For the US
economy, the higher GDP, Personal Income, and Savings give a false read on the cash position of the
consumer and the more our economy begins to look like the "road runner" that has gone over the edge of
the cliff, "but hasn't looked down." (By the way, if you have a mortgage, don't look down, and stop reading
now).
By now you can realize that at least for the GDP accounts, the "GDP Books are totally cooked." If analysis
reverts back to the actual cash economy and actual cash savings, we have entered a phase in the
economy where incomes are not sufficient to service debt. Only income, plus more borrowing, can
service debt. It should be no surprise that the government will borrow over $400 billion, and individuals will
borrow an additional $800 billion to a Trillion in additional mortgage debt. The US government, state and
local governments, businesses, and households, will need to increase their total level of outstanding debt
to over $1.8 Trillion this year just to keep spending at current levels. Why is it that Americans need to
borrow so much more than we make to keep spending constant? Maybe real income, in the form of cash
that can be spent, is far less than it seems.
On to spinning the data. The first level of spin is simply getting everyone to look the wrong way or at the
wrong data. This is the Fed's favorite ploy. When there is a stock market bubble, look at productivity.
When there is a housing bubble, look at deflation.
At the moment, the government and the Federal Reserve have persuaded the general population that the
state of the economy is in much better shape than it really is. Spending must be preserved, and saving
discouraged (or punished with low interest rates and inflation) because of the new housing bubble.
While GDP, Personal Income, and Savings are grossly inflated on a "cash basis," the unemployment
statistics are also being manipulated to down play the severity of the recession. The government has now
come out with monthly revisions, which will help them keep the psychological Unemployment Rate
suppressed way below reality.
Let's look at the data that is harder to manipulate. Help Wanted Advertising for new jobs has never been
lower than today in the entire history of the index. Manufacturers have cut jobs at US factories for 34
months in a row. The length of time people have been out of work is setting new records. The percent of
people in the labor force is hitting new lows.
In order to keep the headline unemployment rate down, the number of people on SSI disability has been
increased by over 1.6 MM to 5.6MM, and there are over 2MM people out of the labor force and in jail. If you
include those who want full time work (and only have part time work), and those who want a job and need
a job (but haven't looked in the last four weeks because there are no jobs), the unemployment rate would
be over 10%.
In addition, the government adds imaginary workers to the job totals every month. When May's
unemployment report came out, you might have noticed that the number of people who actually lost their
jobs over the past couple of years was revised up over 400,000. Since the government has unilaterally
decided that we are in an economic recovery and, in normal economic recoveries a lot of people start
their own businesses, each month the government estimates that between 40,000 to 100,000 workers
find jobs. Once a year, the statisticians have to reconcile assumption with reality. When they did this in
May of this year, 400,000 jobs (that weren't there) vanished, so the total number of people who lost jobs
increased from 2.1MM to 2.5MM.
Since the government and the Federal Reserve want you to believe we are in economic recovery to
encourage spending, they will find lots of imaginary workers to add to the list of employed over the coming
year. Perhaps the imaginary workers can learn to vote?
Spinning and cooking the books also goes to the heart of Inflation, Productivity, and GDP growth. Several
years ago, the government realized they would never be able to pay social security benefits to the elderly.
Congress had made a tragic mistake and had indexed the increase in benefits to the cost of living.
The Fed and Bureau of Labor statistics came up with a brilliant idea. What if they discovered that the CPI
overestimated the rising cost of living? Obviously, the government would have to pay fewer dollars in the
future. When baby boomers were young, this tactic looked wise and clever. Now that baby boomers are
becoming old, under-reporting the CPI could become serious, particularly when the stock market can't be
trusted as a perpetual wealth creation machine.
The CPI has been "fixed" in two ways. First, with falling computer and technology prices, we can
purchase more and better computer equipment for the same money. The same holds true for cars, and
many other goods. The products are assumed to be "better" so inflation remains low. The second fix is to
use a chain weighted price index.
Example: If you like steak, but the cost of beef goes up so you end up buying less expensive chicken,
prices for you didn't really go up that much. However, if you really like steak, your standard of living has
just gone down, because you can no longer afford it.
This is good news for the government because the Federal Reserve can assert prices have hardly gone
up! Between the government deciding how much better products are each year, and the chain weighted
price index, the government may have shaved the CPI by 1% to 1.5% a year. Clearly, there is a big
disconnect on the CPI. If the average American examines their car, home and health insurance costs,
gas prices, food, college tuition, real estate taxes, etc., they will realize that prices are skyrocketing.
Clearly, looking at the CPI, the American worker lives in one world, and the Government lives in another.
For Greenspan, this is wonderful! First, even if job loss continues every month it is likely the GDP reports
will show growth. The falling prices of computers and IT add about 1% a year to "real" price adjusted GDP
growth, even though each year the same number of dollars is being spent on computers and IT. Second,
if GDP is growing and jobs are declining, productivity is growing - by definition. How can an economy be
growing if it has lost 2.5 million jobs, has manufacturing employment down for 34 months in a row, and
must rely on homeowners to borrow an additional $200 billion a quarter against their homes to pay for
food and insurance. The answer has to be in the clever definition that can make "black look white,"
because it makes no common sense.
Our economic statistics could now fit in great works of fiction like Animal Farm, Brave New World, 1984,
Fahrenheit 451, etc. Because the government has "fixed a CPI problem" that wasn't a problem we can
lose jobs every month, and shrink the real economy, yet show real GDP growth and solid productivity
gains. Dishonesty or spin in government continues: The US has economic and productivity growth that is
guaranteed - by definition; the US has 15% of GDP and Personal Income that is made up, "imputed;" and,
a definition of savings that makes savings positive only because of the housing bubble.
What data can you trust? Initial unemployment claims are still real numbers though only 40% of those
who lose their jobs are eligible to file. Look at the US Treasury statements. People who have jobs pay
taxes. The latest quarterly US Treasury statements show that receipts of personal income taxes are
down by 12% from the preceding year. Doesn't common sense suggest that workers paid 12% less to
the US government because they are making less in Personal Income? Thank Alan Greenspan and the
BLS to impute income and show Personal Income growing!
Look at the Flow of Funds data. The data for the first quarter of 2003 shows household debt growing at
10%, and mortgage debt growing at 12%. It also shows that household net worth dropped! This is
astounding. According to one set of government accounts, personal savings is running a strong 4% plus.
When you view the entire picture even with housing prices going up, personal wealth actually dropped,
and the percent of equity held in homes hit an all time low after dropping 2% last year. People are
spending the equity in their homes faster than it is accumulating. Households are eating their "seed corn"
because their income does not support their lifestyle and level of spending.
When you examine government statistics, think about the way the books are being cooked and how the
government is spinning the data. Then, think about why the Fed is making money so "easy" and why they
continue to encourage you to overpay for homes and stocks. The government is looking for volunteers to
take on more debt and keep spending. Greenspan is actually beginning to give investment advice.
Be careful!
Richard Benson
news.goldseek.com |
