I think the ongoing destruction in the Japanese Household sector demonstrates very well a specific shortcoming about economic statistics like GDP. The basic calculation of the particular measure that forms the headlines of almost all commentary is a comparison of the current quarter to the previous one. That right away opens the door to incongruities as there remain very definite seasonal differences between quarters. Orthodox econometrics has decided that this seasonality is easily defined, so it adds its own formulaic adjustments to make each quarter ‘apples to apples.’
Even setting aside whether such adjustments can ever be properly defined let alone measured, that still leaves GDP as a function of second derivatives within each quarterly change – second derivatives that could very well be influenced by what econometrics believes as ‘random’ errors even in seasonality. In terms of Japanese household spending, there is a clear vicious trend at play, but in GDP terms household spending has added a positive contribution to the whole for the past two quarters!
The calculation that twists the signs is that building upon second derivatives. Because household spending was ‘less negative’ in Q4 than Q3, but still negative, household spending ‘contributed’ 0.6% to that overall 2.2%.
This post was published at David Stockmans Contra Corner by Jeffrey P. Snider ‘ February 27, 2015.
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