I made an updated version of this post with 2007 GDP statistics. I also use gold as an index of inflation, in addition to M2.
The commonly published GDP statistics say that GDP is increasing, after adjusting for inflation.
Adjusting for inflation using the CPI is wrong. The CPI understates the true inflation rate. In a previous post, I showed the median household income is DECREASING if you correct for inflation using money supply expansion instead of the CPI.
What about GDP? Does that share the same defect? I use the Federal Reserve's official M2 report, along with this source for GDP unadjusted for inflation. I also looked at the official US government GDP statistics, but the former site looked better and the numbers were close anyway.
I am using the "GDP not adjusted for inflation" statistic.
The GDP was $12433.9 billion in 2005 and $13194.7 in 2006, for a growth rate of 6.119%. M2 was $6408.4 trillion in January 2005 and $6705.8 trillion in January 2006, for a growth in M2 of 4.64%. However, the number of households increased from 113,343 thousand to 114,384 thousand from 2004 to 2005, for a gain of 0.92%. (The housing stats table doesn't have an entry for 2006, so I used 2004-2005 instead of 2005-2006.) This leads to a growth in GDP of about 1.48% in absolute terms, only 0.56% in real terms. This is much lower than the official GDP growth rates.
I correct for the number of households, because with 0.92% more households, you would expect the GDP to increase by 0.92% if every new worker has the same level of efficiency.
If you use M3 instead of M2 as your index of inflation, you would find that real GDP actually was decreasing! The rate of growth in M3 is 10% more than M2, so if you use M3, the US economy is shrinking at a rate of 10% per year!
Let's look at a longer time period. GDP was $5484.4 billion in 1990 and $13194.7 in 2006, for a GDP growth rate of 140.6%. M2 was $3176.6 trillion in January 1990 and $6705.8 trillion in January 2006, for a growth in M2 of 111.1%. In other words, the actual GDP growth rate from 1990 to 2006 was only 29.5%, an annualized rate of 1%. This is a far cry short of the official government statistics.
I still haven't corrected for the increase in the number of households. In 1989, there were 93,347 thousand households, and there were 114,384 thousand households in 2005. That is a gain of 22.5%. If you subtract 22.5% from 29.5%, you get 7%. (The housing stats table doesn't have an entry for 2006, so I used 1989-2005 instead of 1990-2006.)
Contrary to official reports, GDP has only increased by 7% per household from 1990 to 2006. That is an annualized real GDP growth rate of only 0.27%.
If you use M3 instead of M2, you would find that GDP has decreased substantially since 1990. Luckily, the Federal Reserve ceased publishing M3!
I used GDP in this post. If you repeat the calculation with GNP, you probably would find nearly the same result. I'll only perform that calculation if someone asks.
If you calculate inflation-adjusted GDP growth using M2 money supply expansion instead of the CPI, and correct for the increase in the number of households, you find that per-househould GDP has barely increased since 1990. If you use M3 instead of M2, you would find that GDP has substantially decreased!