Courtesy of Doug Short.
How do you get from Nominal GDP to Real GDP? You subtract inflation. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, which is somewhat different from the BEA’s deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics’ inflation gauge, the Consumer Price Index.
Now that we have the third estimate on Q2 GDP, I’ve updated my charts showing quarterly Real GDP since 1960 with the official and three variant adjustment techniques. The first chart is the official series as calculated by the BEA with the GDP deflator. The second starts with nominal GDP and adjusts using the PCE Deflator, which is also a product of the BEA. The third adjusts nominal GDP with the BLS (Bureau of Labor Statistics) Consumer Price Index for Urban Consumers (CPI-U, or as I prefer, just CPI). The forth chart, a recent addition prompted by several requests, adjusts nominal GDP using the Alternate CPI published by economist John Williams at shadowstats.com
Suggestion: Click on any of the charts below and use the links at the top of the chart page to toggle between the versions for a closer comparison.
As we might expect, the two deflators from the BEA produce similar results. The average (arithmetic mean) Real GDP for the first and second charts is the 3.1%. But note the variation from quarter-to-quarter and especially the weaker GDP since the end of the Great Recession in the PCE-adjusted version.
The CPI comes from a different government agency, the Bureau of Labor Statistics, and is calculated quite differently. As an inflation measure, it is much better known than the GDP and PCE deflators, and its growth rate has been higher than the two BEA metrics (see this illustration). If we use CPI as the deflator to compute Real GDP, we see series with a significantly lower mean, higher volatility, and Q2 Real GDP at a stunningly negative -3.0%, (an improvement over the -3.4% of last month’s second GDP estimate).
After my original post of this series, I received several requests for additional version using the Shadowstats alternate CPI as the deflator.
I find this “alternate Real” GDP to be interesting (in a freakish sort of way), but I personally see no credibility in the hyper-negative GDP it produces.
I’ll be updating this chart series for all future GDP releases.
Notes:
- Quarterly GDP dates from 1947, CPI has been tracked since 1913, but PCE only goes back to 1959. Thus I used 1960 as the start date for the chart series. The 1959 inception of PCE explains why the 10-year moving average in the second chart starts later than the other two.
- The three deflators are available from the Federal Reserve Bank of St. Louis data repository: GDP Deflator, GDP Deflator, PCE Deflator, and CPI-U
- For the PCE and CPI-U data series I used the average of the monthly values for each quarter to ensure a true comparison with the quarterly numbers in the GDP deflator.
- I created the charts in Excel using a two-step process. I calculated the Real quarterly GDP for each deflator against the nominal GDP series. I then used this function to calculate the individual quarters: ((Q/previous Q)^4-1)*100
