Fed: GDP is garbage long term

Zero Hedge

Do Alternative Measures of GDP Affect Its Interpretation?

Gross domestic product’s high correlation with unemployment and inflation makes it a key measure of the U.S. economy. Yet the somewhat arbitrary nature of the GDP construction process complicates interpretation and measurement of the indicator. A study of an alternative measure of GDP designed to address the published series’ limitations finds that the adjusted measure differs in its representation of the long-term trend—but not the short-term fluctuations—of GDP. The published series’ relevance as an indicator is therefore robust to some of the arbitrariness of its construction.

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Conclusion

Even though the concept of GDP is straightforward and uncontroversial, the practical interpretation and measurement of the indicator are subject to many limitations. To measure GDP on a quarterly basis, the BEA makes many somewhat arbitrary modifications. Most notably, the BEA estimates and includes in the published measure a considerable amount of nonmarket activity while excluding substantial amounts of market and nonmarket activity that could plausibly be included.

 

A large part of what makes the index useful is its high correlation with other measures of aggregate economic outcomes, such as unemployment and inflation, and the reliability of its trend as an indicator of long-run patterns in other variables, such as government revenues. As we have shown, changing many of the assumptions and modifications made to estimate GDP would likely have little effect on the short-term dynamics of the series. Our study therefore suggests that the relevance of GDP as an indicator of ongoing aggregate economic activity is fairly robust to some of the arbitrariness involved in its construction. [Much as large bank profits are rubust to the arbitrariness of their loan decisions.] However, fluctuations in GDP are not the only indicators of short-term movements in aggregate activity; it is arguable that industrial production can provide a useful alternative.

So, is GDP merely fake but accurate, or are we being encouraged to myopically study only short term fluctuations (isn’t that how we incrementally pushed ourselves over a financial cliff last year)?  Pay no attention to the negative GDP trend behind the curtain.  Industrial Production is conveniently prepared by the Fed itself, so maybe this is just a turf war.

Read the whole thing here.

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