ICangles Investment Post…

With the media focused on the political circus around the debt ceiling, not much attention was paid outside of financial circles to the newest GDP data announced late in July. But it is likely of more concern than the government’s self imposed borrowing limit. The first six months of 2011 were estimated to be the weakest in terms of economic growth since the recovery began. The first quarter is now estimated to have posted annualized growth of just 0.4 percent with the second delivering an uptick of only 1.3 percent. As a result economic forecasts are being lowered for future growth.

The weaker than expected growth was linked to weak consumer spending that some economists blamed on inflation in the form of rising food and energy prices, as May experienced gasoline prices reaching about $4 a gallon. This comes on top of an also weak employment environment with the unemployment rate rising to 9.2 percent in June. Unfortunately, government GDP, inflation and unemployment statistics paint a rosier picture than reality.

Mark Twain is credited with popularizing the phrase, “There are three types of lies: lies, damn lies and statistics.” When it comes to politicians and governments this statement is pretty accurate. Although in fairness to the U.S. government its official GDP, inflation and unemployment data does do a fairly good job of capturing the trend. Yet, the official numbers understate the nature of economic difficulties, as one would expect to be a government’s preference. For instance a 9.2 percent unemployment rate doesn’t seem that bad. It implies that more than 9 out of 10 people who want work have a job. However the truth is that real unemployment is higher. In addition real GDP growth is lower and real inflation greater than what the government reports.

A great website for those inclined to look up economic data points is John Williams’ Shadow Government Statistics.  Along with providing the official government statistics for GDP, inflation and unemployment among others, it also provides numbers that are closer to what people outside of government would call reality. The below chart shows the official government GDP data. But is also shows GDP data adjusted for real inflation–in other words if consumers end up spending more money at the gas pump in order to engage in the exact same amount of economic activity as they otherwise would this is not calculated as representing growth in the economy. Due to such a formulation the below chart shows a far more disappointing picture when it comes to growth in the economy, which more accurately reflects the world many people are experiencing.

Courtesy of ShadowStats.com

The inflation picture is also more worrisome if calculated by the methodology the government used in 1980 prior to “improving” the statistics. Calculated with the earlier method focused on measuring the real cost of living, the inflation rate currently exceeds 10 percent, rather than being under 5 percent.

Courtesy of ShadowStats.com

In terms of gauging an accurate unemployment rate I have previously referenced the Gallup underemployment rate. But Shadow Stats also publishes its own unemployment rate that seeks greater accuracy than the government’s official unemployment rate by including both long-term and short-term discouraged workers who would like a job, but because they cannot find one have given up looking. It also includes those forced to take part time work because they cannot find full time employment. When such people are included in the ranks of the unemployed, the rate jumps from the government’s reported statistic of under 10 percent to over 20 percent.

Courtesy of ShadowStats.com

The bottom line is that the economy is in worse shape than the government would have you believe. But this won’t come as a surprise to most people. In their gut many intuitively know this has not been a robust recovery, rising prices are a problem and the employment environment isn’t a rosy situation where more than nine of out of every ten people who want one have a full time job. And although the debt ceiling may be an artificial crisis, the debt levels of local, state and federal government is a real worry, especially if employment and GDP growth were to further weaken and inflation were to rise. That would mean less revenues to pay debt, greater expenses for programs, like unemployment insurance, and higher debt maintenance costs or borrowing rates. Down the road those could be the ingredients of a real debt crisis.