Thursday, May 19, 2011

Robert Arnott: "Why the U.S. GDP number may be as bogus as a three-dollar bill "

One of the masters, both academically and as a practitioner.
From the Toronto Globe and Mail:
In 10 days, Washington will release its revised estimate of first-quarter economic growth. This figure, based on more complete data than were available when the first assessment was issued toward the end of April, will undoubtedly grab headlines.

It could affect everything from the Federal Reserve’s view on interest rates to corporate decisions about spending and the public’s evaluation of how well the Obama administration is managing the economy. Economists will issue a variety of learned opinions about what it all means.

What most of them will not be saying is that the GDP figure is essentially meaningless.

Many of us instinctively distrust some (okay, a lot) of what governments tell us. Anyone who buys food or fuel these days has a problem with the oft-repeated official line that inflation is tame, so don’t worry about it. And we know unemployment just has to be worse than the official numbers show. But tell us GDP is growing at a faster clip than forecast, and we erupt into loud cheers.

Take Friday, when the Europeans revealed that first-quarter growth in the 17-country euro zone soared by more than 3 per cent on an annualized basis, led by much stronger-than-expected gains in Germany and France. The euro briefly jumped in value and analysts could barely contain their enthusiasm. “The data out of the euro zone … showed Germany and France’s GDPs are absolutely on fire,” one excited currency strategist told Bloomberg.

But what if the number turns out be fake? That’s the provocative question posed by renowned U.S. money manager Rob Arnott, who makes a convincing argument that what passes for growth in the U.S. and a bunch of other deficit-ridden economies is less than it seems.

“It may be for real or it may be phony, based on increases in deficit spending,” Mr. Arnott says of the latest European numbers. But while he’s unsure of euro-zone growth in a new age of austerity, the chairman of California-based Research Affiliates is absolutely certain that next week’s revised U.S. GDP number will be as bogus as a three-dollar bill. That’s because it will not take into account how much of the American expansion stems from the government’s deficit-spending binge.

“Gross domestic product is used to measure a country’s economic growth and standard of living. It measures neither,” Mr. Arnott says flatly. “GDP measures spending. It does not measure prosperity. Unfortunately, the finance community and global centres of power are wedded to a measure that bears little relation to reality.”...MORE
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