One of the economic phenomenon that we have discussed in numerous articles here at The Sounding Line is the unprecedented divergence between rosy government statistics like the unemployment rate and Gross Domestic Product (GDP) and actually economic realities (examples here, here, here,and here). The economic  ‘recovery’ experienced in the US and the European Union since the 2008-2009 recession has largely been a symptom of statistical massaging and redefinition, not fundamental economic improvement.

In order to help better understand how economic statistics can misrepresent underlying economic trends, the X22 Spotlight Report sat down with the expert on exactly that question: John Williams. Mr. William is an economist who runs the website www.shadowstats.com and is an expert in in-depth analysis of economic statistics.

The interview is a bit slow to start but Mr. Williams hits on several critical elements of the unemployment rate and GDP calculations.

On the unemployment rate Mr. Williams notes:

“In terms of the unemployment rate being so low there is an absurdity there that is tied directly to definition and the definition change here was made back in 1994. They overhauled the whole series in anticipation of what was then the NAFTA trade agreement coming into effect and the effect there was that they expected and knew that there was going to be a lot of jobs lost offshore. You’d have plants shut down in towns where those jobs might not be quickly replaced. So they moved to redefine what they call the discouraged worker: people who wanted to work… but couldn’t find a job and eventually gave up looking for work but they still wanted to be employed… The headline unemployment, and this is the definitional end, the one that is at the moment down below 5%… what you are seeing there… is that your counted as unemployed you have to have been actively looking for work in the fast four weeks. If you haven’t been looking for work in the last four weeks you will be counted as a discouraged worker and moved out of the headline employment numbers… After a year they (discouraged workers) are no longer counted in any of the formal employment numbers. Before 1994 there was no time limit on being discouraged. If you were a displaced worker and you’d given up looking for work but you (would be) looking for work if it were available, you would still be counted as a discouraged worker… There are two ways that unemployment drops. The happy way is that people who are unemployed become reemployed, they gain jobs and employment grows and in the normal business cycle that is what you see. But the unemployment rate can also decline if the unemployed are defined out of the labor force and that’s whats been happening here…”

With regard to GDP Mr. Williams correctly states that:

The GDP series has been redefined in the last couples decades to add in all sorts of defined niceties that are purely theoretical but the average guy doesn’t see them from a meaningful standpoint… For examples intellectual properties: big changes in the GDP due to the fact that the US television networks imported intellectual property from Brazil for the Rio Olympics. You have a movie, you put a long term value on it and they plug it into the GDP. You take away all that non-sense… that knocks a lot of the headline GDP growth out of there, but putting that aside there is a major problem with inflation. Inflation has been redefined over the years. One of the factors is what they call hedonic quality adjustments and what’s done there is if a product goes up in cost it could be due to inflation or maybe there have been quality changes that are measurable and that have upped the cost of the product and you need to adjust for quality… There are quality adjustments here that are very difficult to measure… One of the early examples was the government mandating new emissions reformulations for gasoline and what it did… was it added 10 cents per gallon to the cost of gasoline. Now the average person didn’t recognize that extra 10 cents as ‘oh my good I am getting better quality air because of this.’ They are moaning and groaning as they are filling their tank to go to work that the gasoline is costing them more… Nonetheless the government didn’t put it into the CPI and it didn’t get into the headline inflation numbers. Although they later retrenched and reversed that, the concept is there with a lot of issues where the government determines that there is a quality improvement but the person buying it doesn’t have a choice in terms of not buying that quality improvement but as a result… the headline inflation number is reduced. Well the GDP, as it’s reported, is adjusted for inflation and if you overstate inflation you are officially depressing the real GDP, the inflation adjusted GDP, and if you understate inflation you are officially boosting it. Well with the introducing of the hedonic quality adjustment, making adjustments for example to computers, the effect there was to artificially reduce the GDP implicit price deflation, the GDP inflation measure, boosting economic growth and when the United States did this, other countries, Germany and Japan didn’t follow us, at least not right away… Over time the difference now is that… GDP is overstated by about 2% points after inflation adjustment and if you knock out that understatement of inflation what you find is that the GDP, instead of rebounding from its crash into 2007 basically has been flat and we are seeing that in a number of areas ranging from developments in industrial production to the housing market… But just getting back to that GDP number for a moment, just by changing the way the GDP was calculated the US was showing stronger economic growth than countries like Germany and Japan on a relative basis… Germany and Japan initially didn’t change their inflation methodology so this period of protracted weak growth that was seen for example in Japan largely was due to just how people were deflating their numbers… So GDP is the most worthless of series.”

The interview goes on to discuss much more. Enjoy below!