SKIP THE GOV'T NUMBERS - IT'S A RECESSION

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SKIP THE GOV'T NUMBERS - IT'S A RECESSION By JOHN CRUDELE --------------------------------------------------------------------------------

May 1, 2001 -- WE have a recession. The government numbers that were released Friday, of course, don't show the economy retreating. In fact the 2 percent growth in the nation's gross domestic product during the first quarter was so far above the 1 percent Wall Street was expecting that bonds went into a tailspin.

And that caused interest rates to spike higher.

But anyone who lives in the real world - which doesn't include any address near Wall Street or anywhere in Washington where you can see a monument - knows what the economy is really doing.

The extent of the economy's pullback became obvious last week when the Labor Department reported that new claims for unemployment insurance rose 18,000 in the latest week to a seasonally adjusted 408,000.

And an independent research agency, the Conference Board, revealed that its help-wanted index dropped to its lowest level since April 1993 - the tail end of the last economic downturn.

So, with all this bad stuff going on, how did the Commerce Department come up with economic growth of 2 percent - which not only indicates that the U.S. is nowhere near a recession but that business conditions are pretty good?

It's a cruel trick.

First off, the bulk of the 2 percent GDP gains came from improvement in the trade deficit. Without that, growth would have been a mere 0.4 percent.

And the trade deficit number, you need to know, is 98 percent guestimate. A revised figure will come out later.

On top of that there's the miscalculation of inflation.

If the inflation number used in the GDP report was equal to other government figures on inflation, the GDP would have been minus 0.1 percent.

If all the statistical trickery was taken out of the way the government calculations inflation, GDP would have gone negative 1 percent - or maybe even 2 percent. As readers of this column know, the government is expert at reducing the amount of inflation in its figures.

Washington doesn't count inflation, for instance, if it subjectively thinks a product whose price rose also happens to improve in quality. The government also reduces inflation if it thinks you are getting more fun out of something that went up in price (hedonics). Inflation also doesn't count if the government thinks a price increase is an aberration - like the blind eye it turned to the rising energy costs last year.

If Washington stopped the inflation games, that 2 percent GDP growth would probably be negative. And the fourth quarter of 2000 would probably also have had a contracting economy.

In other words, there would be no doubt that we are in a recession. And this would probably be recognized as a bad recession - confirming what any corporate exec or consumer already knows.

Why should you and I care if the government wants to deceive itself?

There's the democracy thing. Governments shouldn't lie.

But there are more practical reasons why it's is dangerous. First, there's the Federal Reserve.

Without good information, the Fed can't pick the right policy. The panicky interest rate cuts that Alan Greenspan has enacted look absolutely stupid in light of 2 percent growth. Luckily Greenspan doesn't believe that number and is basing policy on private forecasts that a recession is inevitable.

So why is there a problem if Greenspan doesn't believe it?

Because the bond market moves on the government's numbers. Interest rates have risen sharply of late - and especially last Friday - because to the financial markets it looks as if the Federal Reserve is screwing up big by aggressively cutting borrowing costs when it shouldn't be.

http://www.nypostonline.com/business/29615.htm

-- Carl Jenkins (smewherepress@aol.com), May 01, 2001


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