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Benson's Economic & Market Trends
Government Statistics:
Lessons in Cooking and Spinning

Richard Benson
Specialty Finance Group, LLC
June 12, 2003

A government is no different in behavior than any corporation in its desire to show the best possible report. For a corporation, there is a bias in reporting high revenues and earnings. For government statistics, it certainly makes the US appear healthier if the GDP is bigger, personal income is higher, and the number of people working is greater. However, when accounting games are used to push up reported numbers that reach a certain level beyond reality, a false sense of security can lead to very bad decisions, both for individuals and the government.

If you are curious about seeing some "jaw dropping" numbers on the economy, take a look at Table 8.21 of the Bureau of Economic Analysis, titled "Imputations in the National Income and Product Accounts" (since the latest data that is available is for 2001, linear trends can be used to estimate current numbers). Right off, you'll notice that if total GDP is about $11.5 Trillion, at least $1.7 Trillion of GDP is "imputed."

What is an imputation, and why should we care? Imputations are the part of GDP that the government decides to estimate, where no cash changed hands, kind of like we "scratched each other's backs." Wouldn't it be a tragedy if this type of activity wasn't counted as REAL GDP? Some of the largest numbers are for items such as $300 billion of Personal Income, imputed for the value of having a checking account (free of charge); $680 billion for the value of owner occupied housing (you should really be paying yourself rent), and $65 billion for the benefit people get from using the property of nonprofit institutions, like going to a church or having a place to hang out during the day. We believe the $300 billion for the value of checking accounts doesn't even pass the laugh test. Perhaps there was value back in the 1950's when it was expensive to clear checks and a case could be made for some measure of value. But, in today's world, just try and bounce a check, use your ATM card in Europe, or pay your credit card one day late.

Banks charge fees in the hundreds of billions of dollars, in real cash. To boost Personal Income by $300 billion (where no cash changes hands) because banks don't charge you enough for the privilege of living off your float, is a joke! Even when you have deposited a check into your account, and the bank has good funds, they can easily take up to a week or two to clear those funds for use. Banks are so friendly!

Why do these imputations really matter? Our economy has become a debt driven economy. Consumers routinely spend 10% more than they make each year by taking on more debt. Debt service and debt total levels are at record highs. However, debt can only be serviced with cash flow. With imputations there is no cash flow. While GDP might be $11.5 Trillion, the cash economy is less than $10 Trillion. The reality is that we have 15% less cash flow to service debt than we think. If corporations "goosed" their revenues because they could use "imputed revenues," the management would go to jail.

The implications of the data for Personal Income and Personal Saving are even worse! Not only is Personal Income overstated by $300 billion due to imputations for checking accounts, but total imputations in Personal Income total over $720 billion. The total includes such items as $90+ billion for owner occupied housing, and $350 billion of heath and life insurance paid for by corporations. While these have value, the individuals never touch the cash!

The Personal Savings rate comes right out of "Alice and Wonderland." First, we have the mythical $300 billion in "non-charged bank fees," and the non-cash $90 billion in the rent home owners don't charge themselves, pushing up personal savings. Then the government estimates the value on new home construction, less housing depreciation, which adds about $300 billion a year. Just taking out the imputations on housing for new construction less depreciation, swings the personal savings number from over a plus $300 billion to a minus $100 billion. If you take out the $300 billion in "non-charged bank fees," personal savings is running a negative $400 billion a year.

The strangest thing is that housing is even part of "savings." The very concept of savings brings up the vision of an individual earning cash that they take to the bank and deposit in a savings account. If you look at Personal Income figures, the consumer is saving over 4% in the first quarter of 2003. If you look at the Flow of Funds data, even with this 4% rate of savings, household wealth declined. Obviously, something is rotten in the numbers. Because the US is in a massive housing bubble, flowing through the rising prices of homes directly into the calculation for savings makes the reported savings number look positive when it is actually negative (the Flow of Funds data just published by the Federal Reserve shows that Household wealth declined in the first quarter of 2003).

Why does this all matter? Looking at our analogy of a corporation with revenues and earnings, the farther away from cash the accounting becomes, the harder it is to decide if the firm is actually solvent or really profitable. The more revenues that have not yet been turned into cash, the less real profits are. For the US economy, the higher GDP, Personal Income, and Savings give a false read on the cash position of the consumer and the more our economy begins to look like the "road runner" that has gone over the edge of the cliff, "but hasn't looked down." (By the way, if you have a mortgage, don't look down, and stop reading now).

By now you can realize that at least for the GDP accounts, the "GDP Books are totally cooked." If analysis reverts back to the actual cash economy and actual cash savings, we have entered a phase in the economy where incomes are not sufficient to service debt. Only income, plus more borrowing, can service debt. It should be no surprise that the government will borrow over $400 billion, and individuals will borrow an additional $800 billion to a Trillion in additional mortgage debt. The US government, state and local governments, businesses, and households, will need to increase their total level of outstanding debt to over $1.8 Trillion this year just to keep spending at current levels. Why is it that Americans need to borrow so much more than we make to keep spending constant? Maybe real income, in the form of cash that can be spent, is far less than it seems.

On to spinning the data. The first level of spin is simply getting everyone to look the wrong way or at the wrong data. This is the Fed's favorite ploy. When there is a stock market bubble, look at productivity. When there is a housing bubble, look at deflation.

At the moment, the government and the Federal Reserve have persuaded the general population that the state of the economy is in much better shape than it really is. Spending must be preserved, and saving discouraged (or punished with low interest rates and inflation) because of the new housing bubble.

While GDP, Personal Income, and Savings are grossly inflated on a "cash basis," the unemployment statistics are also being manipulated to down play the severity of the recession. The government has now come out with monthly revisions, which will help them keep the psychological Unemployment Rate suppressed way below reality.

Let's look at the data that is harder to manipulate. Help Wanted Advertising for new jobs has never been lower than today in the entire history of the index. Manufacturers have cut jobs at US factories for 34 months in a row. The length of time people have been out of work is setting new records. The percent of people in the labor force is hitting new lows.

In order to keep the headline unemployment rate down, the number of people on SSI disability has been increased by over 1.6 MM to 5.6MM, and there are over 2MM people out of the labor force and in jail. If you include those who want full time work (and only have part time work), and those who want a job and need a job (but haven't looked in the last four weeks because there are no jobs), the unemployment rate would be over 10%.

In addition, the government adds imaginary workers to the job totals every month. When May's unemployment report came out, you might have noticed that the number of people who actually lost their jobs over the past couple of years was revised up over 400,000. Since the government has unilaterally decided that we are in an economic recovery and, in normal economic recoveries a lot of people start their own businesses, each month the government estimates that between 40,000 to 100,000 workers find jobs. Once a year, the statisticians have to reconcile assumption with reality. When they did this in May of this year, 400,000 jobs (that weren't there) vanished, so the total number of people who lost jobs increased from 2.1MM to 2.5MM.

Since the government and the Federal Reserve want you to believe we are in economic recovery to encourage spending, they will find lots of imaginary workers to add to the list of employed over the coming year. Perhaps the imaginary workers can learn to vote?

Spinning and cooking the books also goes to the heart of Inflation, Productivity, and GDP growth. Several years ago, the government realized they would never be able to pay social security benefits to the elderly. Congress had made a tragic mistake and had indexed the increase in benefits to the cost of living.

The Fed and Bureau of Labor statistics came up with a brilliant idea. What if they discovered that the CPI overestimated the rising cost of living? Obviously, the government would have to pay fewer dollars in the future. When baby boomers were young, this tactic looked wise and clever. Now that baby boomers are becoming old, under-reporting the CPI could become serious, particularly when the stock market can't be trusted as a perpetual wealth creation machine.

The CPI has been "fixed" in two ways. First, with falling computer and technology prices, we can purchase more and better computer equipment for the same money. The same holds true for cars, and many other goods. The products are assumed to be "better" so inflation remains low. The second fix is to use a chain weighted price index.

Example: If you like steak, but the cost of beef goes up so you end up buying less expensive chicken, prices for you didn't really go up that much. However, if you really like steak, your standard of living has just gone down, because you can no longer afford it.

This is good news for the government because the Federal Reserve can assert prices have hardly gone up! Between the government deciding how much better products are each year, and the chain weighted price index, the government may have shaved the CPI by 1% to 1.5% a year. Clearly, there is a big disconnect on the CPI. If the average American examines their car, home and health insurance costs, gas prices, food, college tuition, real estate taxes, etc., they will realize that prices are skyrocketing. Clearly, looking at the CPI, the American worker lives in one world, and the Government lives in another.

For Greenspan, this is wonderful! First, even if job loss continues every month it is likely the GDP reports will show growth. The falling prices of computers and IT add about 1% a year to "real" price adjusted GDP growth, even though each year the same number of dollars is being spent on computers and IT. Second, if GDP is growing and jobs are declining, productivity is growing - by definition. How can an economy be growing if it has lost 2.5 million jobs, has manufacturing employment down for 34 months in a row, and must rely on homeowners to borrow an additional $200 billion a quarter against their homes to pay for food and insurance. The answer has to be in the clever definition that can make "black look white," because it makes no common sense.

Our economic statistics could now fit in great works of fiction like Animal Farm, Brave New World, 1984, Fahrenheit 451, etc. Because the government has "fixed a CPI problem" that wasn't a problem we can lose jobs every month, and shrink the real economy, yet show real GDP growth and solid productivity gains. Dishonesty or spin in government continues: The US has economic and productivity growth that is guaranteed - by definition; the US has 15% of GDP and Personal Income that is made up, "imputed;" and, a definition of savings that makes savings positive only because of the housing bubble.

What data can you trust? Initial unemployment claims are still real numbers though only 40% of those who lose their jobs are eligible to file. Look at the US Treasury statements. People who have jobs pay taxes. The latest quarterly US Treasury statements show that receipts of personal income taxes are down by 12% from the preceding year. Doesn't common sense suggest that workers paid 12% less to the US government because they are making less in Personal Income? Thank Alan Greenspan and the BLS to impute income and show Personal Income growing!

Look at the Flow of Funds data. The data for the first quarter of 2003 shows household debt growing at 10%, and mortgage debt growing at 12%. It also shows that household net worth dropped! This is astounding. According to one set of government accounts, personal savings is running a strong 4% plus. When you view the entire picture even with housing prices going up, personal wealth actually dropped, and the percent of equity held in homes hit an all time low after dropping 2% last year. People are spending the equity in their homes faster than it is accumulating. Households are eating their "seed corn" because their income does not support their lifestyle and level of spending.

When you examine government statistics, think about the way the books are being cooked and how the government is spinning the data. Then, think about why the Fed is making money so "easy" and why they continue to encourage you to overpay for homes and stocks. The government is looking for volunteers to take on more debt and keep spending. Greenspan is actually beginning to give investment advice.

Be careful!

Richard Benson
rbenson@sfgroup.org
June 12, 2003
President
Specialty Finance Group, LLC
Member NASD/SIPC
1 800-860-2907

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