It is hard to believe that the Bureau of Economic Analysis uses an inflation rate even more contrived than what is issued by the Bureau of Labor and Statistics.

Fantasy Land - VHF

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The BEA's Second Estimate of First Quarter 2011 GDP

Rick Davis - Consumer Metrics Institute

May 26, 2011

In the longer view the Bureau of Economic Analsysis (BEA) reported that the year-over-year (trailing twelve month) change in the "real" GDP was 2.3%, the lowest year-over-year growth rate reported since 2009. And governmental expenditures at all levels continued to shrink, with the new "austerity" at the Federal level (i.e., expiring stimuli) shaving 0.68% off of the overall growth rate, and genuine state and local frugality dropping the headline growth rate by another 0.39%.

The importance of the price deflater used by the BEA cannot be overstated. In calculating the "real" GDP the BEA continued to use an overall 1.9% annualized inflation rate, which is substantially lower than the inflation rates being reported by any of the BEA's sister agencies. The mathematical implications of the deflater are simple: a lower deflater creates a higher "real" GDP reading. If April's CPI-U (as reported by the Bureau of Labor Statistics) of 3.2% year-over-year inflation is used as the deflater, the reported 1.84% annualized growth rate shrinks to a 0.56% annualized rate, and the "real final sales of domestic products" is actually contracting at a 0.63% rate. If instead of the year-over-year CPI-U we were to use the annualized CPI-U from just the first quarter (5.7%), the "real" GDP would be shrinking at a 1.82% annualized rate, and the "real final sales of domestic products" would be contracting at a recession-like 3.01%.

Although the overall reported headline rate for the GDP remained essentially unchanged, the numbers reflected somewhat weaker consumer contributions and anemic "real final sales" -- all while using a price deflater that strains credibility. But the published end result might be exactly what Mr. Bernanke would like to see as a justification for extending the Federal Reserve's "Quantitative Easing" programs: pitiful growth in desperate need of further intervention.