Curious GDP Deflator: Understanding Why Q2 GDP Growth Wasn’t 0.6%

By: PhilStockWorld

Courtesy of Doug Short:How do you get from Nominal GDP to Real GDP? You extract inflation from the numbers. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, one that is somewhat different from the BEA’s deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics’ inflation gauge, the Consumer Price Index.

Today’s Advance Estimate of Real GDP surprised to the upside at 1.67%, which gets rounded up to 1.7% in the popular press. Investing.com had forecast 1.0% and Briefing.com‘s GDP consensus was for 1.1%.

But equally surprising was the disinflationary trend in the BEA’s deflator for today’s calculation. Remember: The lower the defator, the higher the GDP. Also I should point out that the deflator is the compounded annual rate of change. The GDP deflator for Q1 of this year was 1.7%, which is right at the 1.75% deflator average for the past 14 quarters (since Q4 of 2009). Briefing.com’s deflator forecast was for 1.6%, just a tad below the recent average. What would GDP have been if the deflator had been at these levels?

GDP with the 1.6% deflator as forecast by Briefing.com would have been 0.78%, which rounds to 0.8%

GDP with the average deflator over the past 14 quarters (which is 1.75%) would have been 0.64%, which rounds to 0.6%

I’ll investigate the topic of alternate deflators more closely after we get the BEA’s June PCE deflator on Friday.

- Phil

www.philstockworld.com

Philip R. Davis is a founder of Phil's Stock World (www.philstockworld.com), a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders. Mr. Davis is a serial entrepreneur, having founded software company Accu-Title, a real estate title insurance software solution, and is also the President of the Delphi Consulting Corp., an M&A consulting firm that helps large and small companies obtain funding and close deals. He was also the founder of Accu-Search, a property data corporation that was sold to DataTrace in 2004 and Personality Plus, a precursor to eHarmony.com. Phil was a former editor of a UMass/Amherst humor magazine and it shows in his writing -- which is filled with colorful commentary along with very specific ideas on stock option purchases (Phil rarely holds actual stocks). Visit: Phil's Stock World (www.philstockworld.com)

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