As the economic situation deteriorates, we are seeing governments around the world start to change the economic data and even the way they define economic recessions. Usually we are told that governments like the one in the U.K. and the U.S. can be trusted with the data and that one should not believe anything governments from China and other emerging market countries publish in term of economic data. Today we will look at the U.S. and the U.K. and how these two governments are changing data and definitions.
We will start with the U.S. and the GDP or Gross Domestic Product data. Historically economists and even politicians have defined two consecutive quarters of negative growth or GDP as a recession. So when the GDP data for the second quarter came out on June 28th the number dropped by 0.9% and coupled with a drop of -1.6% in the first quarter the U.S. economy is in a recession. If you listen to the Biden administration and the people who run the U.S. central bank or the Federal Reserve the economy is not in a recession. In short, they have decided to change the definition of what a recession. My view is that if they admit to a recession, they’d have to admit to stagnation which is a combination of a shrinking economy and high inflation.
Another economic data the U.S. government seems to be tinkering with is the labour market numbers. With the economy in a technical recession as we have seen above one would expect job growth to be negative or meagre at best. So on August 5th, when the BLS or Bureau of Labor Statistics said that non-farm payrolls rose by over 500k many were surprised as the expectation was for an increase of 250k. The BLS job’s data is a survey from which they later extrapolate a national number and they have known to revise them lower years later. In this latest set of data they added 309k jobs as they estimated that these were created from the economy cresting new businesses! Are we really to believe that an economy that is shrinking is leading to new businesses opening up and creating so many jobs?
Moving to this side of the pond we are now seeing the government and the Bank of England changing the way CPI or the Consumer Price Index is measured. The CPI is a measure of inflationary pressures and with the Bank of England seeing CPI rising to 13% by year end is it any wonder the government has ordered the ONS or Office for National Statistic to make sure the CPI is adjusted to show a lower number.
This change was not published in the media but luckily, by chance I found that because I have been using the Bank of England’s inflation calculator for the last few years and have found it a useful tool to bring home the point that under a sound money system the currency maintains its value and there is virtually no inflation.
The Bank of England inflation calculator goes as far back as 1209! In my YouTube channel, maneco64, I have focused on the period from 1821 to 1914, which is the period after the Restriction Period (1797 to 1821) which was when the bank of England suspended the gold standard due to the Napoleonic wars.
From 1821 to 1914 Britain went back on the gold standard and according to the BOE/IC inflation averaged -0.1% per annum and one only needed £0.95 in 1914 to buy the same basket of goods that cost £1 in 1821. So for almost 100 years when Britannia ruled the waves the pound actually gained purchasing power.
Up until June last year, which was the last time I referred to the BOE/IC I also checked the inflation rate from 1914 to 2020 and found that it averaged 4.6% per annum during that period and that one needed £118 in 2020 to purchase an equivalent basket of goods worth £1 in 1914! I had also looked at the period from 1997 to 2020 as 1997 was when the Bank of England was granted independence by the Labour government and as a result given a 2% inflation target. In that 23-year period the BOE/IC showed an average of 2.7% inflation per annum which clearly showed the Old Lady had missed its target.
So when I did a recent report for my YouTube channel on the CPI I again referred to the BOE/IC and to my astonishment all the data that I had reported last year since 1914 had been dramatically changed to show much lower inflation. For example, the 1914 to 2020 period now shows an average inflation per annum of 4.2% and one needs £78.53 in 2020 instead of £118 to purchase the equivalent of £1 worth of 1914 goods.
The most shocking change was for the period (1997 to 2020) since the Bank of England was granted independence. Instead of an average annual rate of 2.7%, the BOE/IC now shows a much lower rate of 1.9% which is actually under the 2% target! I leave it to you the reader to make up your mind about the Bank of England’s intention in basically revising history. My take is that along with the government they will now try to make inflation look lower than it actually is. Their excuse will be that they, with the number crunchers at the ONS, have found a “better” way to calculate inflation. The conclusion to draw form this current phenomenon is our own governments are trying to paint a rosier picture for the economy as politicians don’t win elections when the economy is in a poor state. More importantly for you and I is the fact that we should be cautious not to base our financial decisions on official government statistics. I’d say day to day anecdotal evidence that we collect from our experiences in the real world should give us a much better picture of what is going on in the real economy.