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Watch for Wednesday's new fictitious U.S. GDP

07/30/2013  09:42
(Barcelona) - While the attention on Wednesday is shifted towards the FOMC meeting at 18 GMT, the U.S. GDP numbers published hours earlier at the NY open will also be gathering plenty of headlines, with especial intrigue this time, as the U.S. government recently decided a new way of calculating it, which only helps to increase its divorce with reality.

Could the U.S. tricks get more conspicuous?

Due to the new tricks the U.S. government has implemented to its old formula of calculating GDP, before being a sum of private consumption + gross investment + government spending + (exports − imports), to now throw into the mix research and development spending, art, music, film royalties, books, theatre, the US economy is expected to 'officially' become 3% larger.

Albert Sung, author of the Katchum Macro-Economic Blog, shared a nicely well-expressed take on the latest sleight by the U.S. government, noting "Research and development (R&D) spending, which shouldn't even be accounted for as investment, adds around 2% to the U.S. GDP number, while art, music, film royalties, books and theatre add another 0.5% to U.S. GDP. Another adjustment has been made to pension accounting, now looking at the "promise" to pay out pensions."

If the new format was not 'imaginary' enough, even commissions, legal bills and expenditures on real estate transactions are included in the new GDP as "investment." Sung added, "Obviously these expenditures aren't associated with real production."

Consequences: Take the charts you see with a grain of salt

As a result of the U.S. being the first to adopt new international standard for GDP accounting, comparing its growth with other countries is not longer that relevant, and a more detailed inspection of the internal components by investors will have to be inevitably conducted to actually measure U.S. 'real' production, as there are clearly some items now that will likely still be received with a dubious perception, as the value they add to the economy is 'debatable'...

Lewis Alexander, chief U.S. economist for Nomura, says the new additions are meant to reflect a shift in what’s important in a twenty-first century economy. As the Financial Times Editor Robin Harding explains, "The changes will affect everything from the measured GDP of different US states to the stability of the inflation measure targeted by the Federal Reserve, forcing economists to revisit policy debates about everything from corporate profits to the causes of economic growth."

Additionally, this 'premeditated' revision will continue to mislead the public by artificially inflating economic indicators, with the ultimate intention of improving the look on some of its most spooky charts such as debt to GDP, which is at 105% now, yet it will drop by 3% just because of this adjustment to the GDP number.

As Sun adds: "This fictitious drop in debt to GDP will highlight that the U.S. improved its debt load, while it did not. Another example is government spending as a percentage of GDP. By increasing the GDP number, we will get a lower government spending number, which allows the government to increase spending."

Bottom line is that the market will have to take a relative approach to the headline GDP numbers on Wednesday, as the 3% increase in the number will be imaginary. Do not be fooled by mainstream media pundits who will probably magnify the economic numbers to create excitement across the marketplace. Stick to the core barometers that make an economy grow for real.

While the attention on Wednesday is shifted towards the FOMC meeting at 18 GMT, the U.S. GDP numbers published hours earlier at the NY open will also be gathering plenty of headlines, with especial intrigue this time, as the U.S. government recently decided a new way of calculating it, which only helps to increase its divorce with reality.

(Market News Provided by FXstreet)

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