Don’t Judge a GDP Report by Its Headline

From the initial estimate of first-quarter GDP to the second one released today (May 29), we moved from stagnating economic activity (0.1% rate of growth) to a contraction, a 1% decline to be exact.  This marked the first time since 2011 that the U.S. economy had a quarter of declining economic output.  Despite the downward surprise, initial equity market reaction was ehh – the French might say “comme ci, comme ça.” In fact, as of mid-morning, most U.S. equity indexes were in the green.

Inventories explained most of the downward revision.  Inventories accumulation detracted about 0.57 percentage points from GDP in the initial estimate, that drag was downwardly revised further to 1.62 percentage points.  This is good news.  Reduced inventory accumulation last quarter means that inventories will be less likely to hinder growth this quarter.  Net exports remained a big drag on GDP growth for the quarter, detracting 0.95 percentage points from GDP (versus 0.83 percentage points initially estimated).

There were some other modestly positive data points in the report.   Personal consumption spending was revised up slightly to 3.1% from 3%.  Services spending remained the biggest driver of consumer spending growing 4.3% last quarter, mostly coming from health services and utility spending. But, durable goods’ spending growth moved from 0.8% to 1.4%.

Aside from the inventory component, business-investment growth was a bit less bad or a little bit better, depending on whether you’re an optimist or a pessimist.  Intellectual-property spending growth increased from 1.5% to 5.1%.  The contraction in equipment spending reduced in magnitude from a 5.5% decline to a 3.1% decline. The one worrisome component was nonresidential-structures spending.  Spending was initially about flat, but then downwardly revised to -7.5%.

State and local spending was downwardly revised from -1.3% to -1.8%.  That decline remains out of sync with growing state and local government revenues.  As of 2013, 28 states actually had money in their coffers.

We do continue think that much of weakness in the first quarter was temporary.  Real final sales to domestic purchases grew 1.6% last quarter; not great, but showing more underlying momentum in the overall economy than the headline GDP would suggest.

Other data suggest the U.S. economy is already rebounding from the weak first quarter.  Over the last three months, payroll growth has averaged about 238,000.  Consumer spending on durables was likely suppressed by the cold winter weather.  Retail sales significantly improved in February and March; by April, on a three-month annualized basis, sales growth averaged 5.2% compared to 1% in March. Residential construction will likely rebound in coming quarters.  Building permits, which lead housing starts and are less prone to weather impacts, have exceeded a 1,000,000 annualized pace for six of the last seven months.  Capital spending may accelerate yet this year. There are lots indicators pointing to a rebound.   As of 2012, nonresidential structures were the oldest since the mid-1960s at 22.2 years old on average. Capital spending surveys are positive. Commercial and industrial loans are accelerating.


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