GDP – a disappointing report
Yesterday I addressed the weak high-frequency indicators, specifically with respect to leading indicators of investment spending on equipment and software (durable goods). I argued that Q2 has not started off well, given that the real core orders for capital goods are down compared to the January to March average.
The BEA reported that Q1 2011 growth was 1.8% on a seasonally-adjusted and annualized basis, which is unrevised from the first release but the composition of spending changed somewhat. On the margin, Q1 2011 looks a bit less stellar (if you can call 1.8% annualized growth ‘stellar’) with consumption growth being revised downward to 2.2% over the quarter (previously 2.7%). Below is an illustration of the Q1 2011 contributions to GDP growth before 8:30am (1.75%) and after 8:30am (1.84%).
I think that the story is pretty simple: higher gasoline prices is even worse for consumption than initially anticipated, and inventory accumulation remains a large driver of economic performance.
It’s still way to early to predict what the entirety of 2011 will bring – the IMF forecasts 2.8% annual growth – but the bar’s rising on the quarterly growth trajectory to attain that level of growth. I suspect that forecasts will be revised downward.
READ MORE AFTER THE JUMP!
Although this is purely conjecture since the April figures are only recently rolling out, Q2 2011 growth is unlikely to be much better. Investment spending is already looking weak for April. And consumption growth may be lackluster on auto sales (H/T spencer) – durables consumption accounted for half of the quarterly growth rate in consumption (0.66% contribution to total GDP quarterly growth). Government spending is a drag, so it’s up to net exports!
Let’s look at what’s happened to the spending components of GDP during the ‘recovery’.
The chart illustrates the cumulative growth in the spending components of GDP (ex inventories). Exports and imports have bounced back on a strong rebound in international trade, 21% and 20%, respectively. Domestic spending is being driven largely by investment spending: consumption is 4% above it’s lows, while fixed investment spending is up 8% (of course, the decline was much larger). Government spending is broadly unchanged (-0.2%) since the outset of the recovery.
There’s much more to this report, like profits and wages, so I’ll revisit if time permits.
Rebecca Wilder
It might be helpful to have a quick note on the GDP deflator.
It was reported to have risen at a 1.9% annual rate and that appears to be very low when compared to some of the other inflation measures like the CPI.
It is low. Note that the deflator for gross domestic purchases rose at a 3.8% rate and the deflator for personal consumption expenditures also rose at a 3.8% rate.
This 3.8% rate is probably a better read of the actual inflation rate not the 1.9% rate.
Because of the way GDP is calculated when you get a sharp spike in import prices — and
import prices rose at a 21.8% rate and goods imports showed a 25.6% rate of price increase–
it tends to distort the GDP deflator. This is because when GDP is calculated imports are
subtracted from GDP. This is the correct way to do it because imports are also included in the domestic final demand numbers and subtracting it eliminated this double counting. GDP measures domestic output so when you buy an imported car, for example, the purchase is included in the personal consumption expenditures. So to estimate what is produced domestically, what GDP measures, it has to be backed out of the data.
But when you see a sharp jump in oil prices — like in the 2nd quarter — it will distort the GDP deflator making it appear to understate inflation.
You just have to take the low number with a grain of salt and recognize that it is a data distortion.
“Driven by investment spending…” Sounds like another bubble in the making, to me. All that money being pumped into the economy by QE2 is going somewhere, the question is “Is it going to productive improvement, or just bidding up the prices of equities and commodities, funding takeovers, and other non-productive uses.”
This is the first time 7 quarters into a recovery:
1) since the 1948-49 recession that real residential investment is down.
2) since the the 1969-70 recession that real (total) government consumption and investment expenditures is down.
3) that real state and local government consumption and investment expenditures has ever fallen.
In addition, 60.2% of all real GDI growth this recovery has gone into corporate profits. This is of course a new record. In the previous recovery 46.9% of real GDI growth went to corporate profits in the first ten quarters. The average amount of real GDI growth going to corporate profits of all postwar recoveries excluding the last one was 20.8% through the tenth quarter.
This posting and the comments certainly depress me. The good news is that real GDP this year will be higher than the pre-recession 2007 high point even with these lousy “recovery” growth rates. However, the bad news includes that it’s not much helping even the federal government budget, which somehow lost ground in tapping this economy for income taxes and isn’t gaining it back. Like last year, individual income tax receipts this year will be about 6.3 percent of GDP, down from 8.4 percent in 2007, and corporate income taxes will be about 1.3 percent of GDP, down from 2.7 percent, according to OMB. Slightly larger economy, much less revenue from the two income taxes.
“Q2 2011 growth is unlikely to be much better” If Q2 gDp hasn’t improved relative to Q1, then either inflation’s higher or money velocity has fallen.
This is such a wonderful analysis of everything. You are really exciting.
Rebecca,
Do you think that the offshoring to less fortunate workers has any kind of impact on the Domestic GDP measurements ?
Check farmland. There was a very interesting report on Marketplace about the price of farmland, driven both by ethanol consumption and exports, driven by the cheaper dollar. They quoted Robert Schiller.