How GDP Data Blocks Us From Seeing the Recession

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Economists look to GDP to determine if the US economy is in a recession. Generally, it takes two quarters of the economy shrinking (economists call it negative growth, but they’re linguistically challenged) for the National Bureau of Economic Research to declare a recession. Of course, those two quarters indicate the bottom of the recession, by definition.
The problem with GDP accounting is that it ignores about half the economy. GDP was designed to calculate new, value added production. Using standard accounting lingo, GDP is not gross anything; it’s net production. Net numbers, such as net profit, are the gross (total) sales minus the costs of doing business, such as material costs. That’s GDP. So GDP mostly counts retail sales and government spending while leaving out most industrial production. And that’s one reason that recessions take mainstream economists by surprise.

Recessions start in the mining, energy, industrial production sectors that are missing from GDP. They spread to shipping, railroads and trucking and finally hit retail, GDP, last. The odds are good that the US will hit its two quarters of shrinking GDP early next year, but that won’t be the beginning of the recession. It will be the bottom. The beginning will be calculated from the peak of previous GDP growth, probably the second quarter of 2015.

We have been watching the slow motion destruction of the industrial/capital goods sector for a while:

Continues on AffluentInvestor

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