04 November 2007

OK, I Was Right, How Did I Do That?

Remember when I said that "Maybe they know that there is some level of bullsh&% in the figures that they cannot trust." In response to why the Fed would cut rates when the economy was growing at a brisk 3.9% growth rate? I also noted that the markets felt the same way too. The dow fell something like 350 points.

Well, Barry Ritholtz of
The Big Picture gives us all the specifics on what happened. It appears that a measure of inflation, "the price deflator rose a much less than expected .8% vs expectations of 2%."

Essentially, this is a measure of inflation, and is used to separate out real growth from inflation. By lowering the price deflator, you count inflation as real growth.
The average of the price index since Q1 2004 to Q2007 was 2.98, ranging froma low of 1.7% to a high of 4.2%. Thus, if the deflator matched consensus, it would have generated a GDP of 1.9%; if it was at its recent 3 year average of 2.98%, GDP would be ~1%.



See the graph, and notice the WTF: point.

This I think, is the difference between an amateur (me) and a professional (Mr. Ritholtz). I knew in my gut that something was off, but a professional can tell where, and how.

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