The Two Faces of Economic Reporting

This just cheeses me off. 

Yesterday, the US government released figures showing that GDP grew at an annualized pace of 3.3%.  The implicit message:  Yippee, we’re not in a recession!

The press, of course, ate it up.  AP crowed:  “The U.S. economy grew in the spring at a 3.3 percent pace. The best gross domestic product results in nearly a year beat Wall Street’s expectations.”  The Voice of America’s headline trumpeted: “US Economy Growing at Faster Rate Than Predicted.”  Even the Canadian press got into the act:  “US economy shows vigour in Q2.”

But today, the other shoe dropped.  Even though GDP was up last quarter, personal income declined in July.  Apparently it was the largest drop in three years.  So just one day after the press hypes a good news story about how “the economy” is growing, we find out that people are actually poorer!!  Talk about whiplash.

There are so many lessons in this little episode…

1. Too many reporters elevate the “economy” over people.  Look, the GDP is just an accounting convention.  It measures how much money changes hands, NOT what people get for their money:  it counts what we spend, not what we value.  In an ideal world, GDP statistics should be a footnote to economic reporting.  Instead, it’s become the man story:  for some reason, reporters and policymakers have elevated this one statistic above all else, and joyfully trumpet the good news for the “economy” even as more and more people are falling behind. 

2.  GDP and income aren’t closely linked anymore.  One reason, perhaps, that GDP figures are so entrenched is the memory of the broadly shared economic growth of the 1950s and 1960s—when incomes and GDP really did rise hand in hand.  But those days are long gone.  For decades now, reports of economic “growth” have had very little to do with economic gains for the poor and middle class. So it should be absolutely no surprise that trends in income and gross output can move in opposite directions—and that the “economy” can do well even as people struggle. It’s high time that reporters caught on to the new reality—GDP isn’t much of a bread-and-butter story anymore, and “economic growth” doesn’t mean what we think it does.

3. We read too much into the blips.  The stock market soared yesterday, in part on the news of the strong GDP figures. It’s fallen back today, perhaps because of worries over consumer spending. But both GDP and income figures are probably wrong — they’re typically revised, sometimes substantially, in subsequent data releases.  Besides, quarter-by-quarter and month-by-month blips don’t tell much, really, about long-term economic trends.  The monthly and quarterly data often contains as much “noise” as “signal.”  But we still seem to treat the most recent releases as gospel.  That’s simply a mistake.  (On the market, fortunes are made and lost betting on the short term direction of these trends—and it really is betting.)