In the first quarter of 2015, it was suggested that the seasonal adjusting methodology understated economic growth in first quarters. Now in the second quarter of 2015, the scuttlebutt is that the inflation adjustment has overstated economic growth. My position is that the Bureau of Economic Analysis' annualized methodology for determining headline growth magnifies normally insignificant error – and that USA economic growth has really been in a tight range since the end of the Great Recession.

I have a history of bad mouthing GDP – mainly because I see most pundits misusing what it says. One would think that GDP has an direct relationship to Main Street as approximately 2/3rds of the comes from the consumers. But just because total consumption improves, we know the median consumer cannot be contributing much to this increase.

Indexed value of Median Household income to GDP 

The USA economy is being driven by rich consumers – it is that simple. So when people think that rising water lifts all ships – this is not true in the case of GDP.  Still GDP is a valid economic measure as long as one realizes that it is measuring only a certain cross-section of the economy. It does not measure stress or conditions on the poor, Joe and Jane Sixpack, or the average person who believes they are middle class. There are several other issues which make GDP irrelevant to the majority of the population – but that is for another post.

But the annualizing headline GDP is like riding on a roller coaster. It makes small changes between quarters into HUGE changes, it magnifies error, and most importantly – it presents the wrong conclusions on economic growth.  This is a classical mountain-out-of-a-mole hill situation.

Headline Compounded Rate of Growth for GDP

But when we start looking at GDP year-over-year growth, the rate of economic growth looks more realistic and much less noisy.

Year-over-Year GDP Growth

The blue line in the above graph is GDP without inflation adjustment (and the red line includes the “official” inflation adjustment).  Either way we view GDP in year-over-year fashion, year-over-year growth declined from 1Q2015 to 2Q2015. Yet the headlines show economic growth was better in 2Q2015.