Idle Rambling On Today's GDP Number -- April 26, 2019

Updates

April 28, 2019: see first comment. A reader provides this approach to calculating / validating GDP --

http://marketwatch666.blogspot.com/2019/04/1st-quarter-gdp-march-durable-goods-new.html.

April 27, 2019: a very, very credible reader responded to the note below with a single "word": "bs." I don't know if he was calling my "essay" "bs" or if he was calling out Warren Buffett 'sand Paul Krugman's suggestion that "debt did not matter" was "bs." I hope the latter. LOL. Whatever. I can't disagree. I think most folks would argue, like the reader, did that "debt doesn't matter until it does."

But we learn things along the way. It seems that Krugman and Buffett are distinguishing between debt that is "owed to others" and debt that is "owed to ourselves." That may be something to explore later on.

Original Post

Disclaimer: this whole issue is well beyond my expertise. There may be a lot of crazy talk below but keeping in the spirit of the blog as noted in the "welcome/disclaimer" for the entire blog, I will post it, let the buffalo chips fall where they may, an essay probably not ready for prime time, and probably full of holes. 

A reader suggests that the GDP report today was the result of a bit of smoke-and-mirrors, arguing that the debt is a big concern. [The reader did not use the "smoke-and-mirrors" analogy; that was my paraphrase.]

I used to agree 1,000% that "debt is a big concern." I don't know any more, not since two prominent Democrats have suggested otherwise.

A Nobel laureate in economics and one of the most successful businessmen/investors ever both said, "debt doesn't matter."

This article is dated April 26th, and although I don't see the year anywhere on the page, the URL suggests it was posted today, April 26, 2019.

The writer at the linked Washington Post article feels very strongly that debt does matter, in an essay titled: five myths about federal debt. From "myth no.1" to get us started:

In 2015, Nobel laureate Paul Krugman wrote that “because [public] debt is money we owe to ourselves, it does not directly make the economy poorer (and paying it off doesn’t make us richer).”

Stephanie Kelton, a prominent advocate of modern monetary theory, says that “we should think of the government’s spending as self-financing since it pays its bills by sending new money into the economy.” In 2011, Warren Buffett said, “The United States is not going to have a debt crisis as long as we keep issuing our debts in our own currency.”

2011, 2015: Barack Obama was president. 

It would be interesting if Krugman and Buffett would say the same thing now, in 2019, that debt doesn't matter.

Anyway, back to the "smoke and mirrors." This is the link to which a reader referred regarding today's GDP number, from MIsh Mash, "explaining the first-quarter GDP 3.2% surprise."

Mish says that "GDPNow, as volatile as it is, seems to have a far better model."

I followed and posted "GDPNow' data regularly for about a year or so, and then noted that "GDPNow" seldom correlated with the final GDP figures and quit following it.

I started to get the feeling that one could get almost GDP reading one wanted. That's hyperbole, of course, because there are so many folks that follow this, the final GDP reading has to correlate, at least to some degree, with reality.

Having said that, the "GDPNow" model would have given us 2.7% vs the 3.2% which would have been a great number also, just not the eye-popping, headline number of 3% that was not expected (and in line with what the president thought the US could achieve).

Or as Hillary would say: "2.7%. 3.2%. What does it matter?" On that I agree with Hillary.

So, where are we? Or perhaps better, "where am I?"

I read the entire Mish Mash article quickly, but nothing really popped out as remarkable. I focused on what the writer said near the end. A good writer would want to conclude with a zinger to support his/her case. Mish's ending remarks focused on the core price index (CPI). The Fed, it seems, in a 30-second, elevator speech, appears to follow the CPI when arguing its two mandates (inflation and jobs).

The GDP core price index was 1.3% vs 2.0% in the fourth quarter. That is what blew me away.

The debt? Back to where I started. One of the best known economic Nobel laureates and one of the most successful businessmen/investors of all time are both on record saying debt doesn't matter. 

By the way, what did "the market" feel about the GDP, headed into a weekend? All three indices closed higher and the gains were not trivial. The S&P 500 rose almost 14 points. If the S&P 500 didn't close at a new high, it came very, very close. It's intra-day high of 2,939.88 was very, very close to the all-time intra-day high of 2,940.91. (Those numbers may be subject to change.)