June 26, 2013

OUCH — 1Q13 GDP, Third Estimate: An Annualized 1.8%, Down From 2.4% in May, and Way Down From the 3.0% Original April Prediction (Update: The Farm Inventories Mystery)

Filed under: Economy,Taxes & Government — Tom @ 10:00 am

I vaguely remember someone saying that the initial 2.5% reading two months ago was too good to be true:

… the consumption element seems far too high, especially with the March slowdown in retail sales.

Here’s part of the report from the Bureau of Economic Analysis:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.8 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the “third” estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent.

The downward revision to the percent change in real GDP primarily reflected downward revisions to personal consumption expenditures, to exports, and to nonresidential fixed investment that were partly offset by a downward revision to imports.

And don’t forget that initial expectations in April were for a reading of 3.0%. Oops.

Predictions today were for no change. Oops, again.

I also thought that the farm inventory buildup number was ridiculous, and that it would come down. Well, it didn’t, instead going from an initial 0.78 points of GDP in April to 0.83 points today. So about 45% of the first quarter’s GDP growth occurred because we produced — but didn’t sell — a lot more food. Really?

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UPDATE: The farm inventories mystery deepens (please, try to stay awake :–>) –

FarmInvsPerGDPreport1Q

Farm inventories in current dollars only increased by $1.9 billion, or $7.6 billion annualized (after multiplying by four).

The increase in farm inventories reported today in current dollars (already annualized) was $23.2 billion, or over triple the reported inventory change.

The following footnote found at BEA’s tables (can’t link, because the tables are interactive) is useful, but still unsatisfactory:

Inventories are as of the end of the quarter. The quarter-to-quarter change in inventories calculated from current-dollar inventories in this table is not the current-dollar change in private inventories component of GDP. The former is the difference between two inventory stocks, each valued at its respective end-of-quarter prices. The latter is the change in the physical volume of inventories valued at average prices of the quarter. In addition, changes calculated from this table are at quarterly rates, whereas, the change in private inventories is stated at annual rates.

That explanation tells me why there can be a difference. It doesn’t explain why the difference is so large.

I have a call into the Bureau of Economic Analysis for an explanation. If I get one, I’ll update. Until then, I have to believe that the big farm inventories gain in the first quarter is going to be largely offset in the second, which doesn’t bode well at all for reported overall second quarter GDP growth.

UPDATE 2: Also, the April 0.25-point contribution to GDP growth for all other inventories moved to a 0.26-point decrease in June.

So farm inventories, which are about 10% of all inventories, somehow had triple the influence in the opposite direction of the other 90% of inventories. I certainly think we need to know what’s going on behind the curtain.

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18 Comments

  1. That farm inventory change is VERY odd. I must note, however, that it comes off of two quarters where it dropped by $19.2 billion (2005 chained) and $15.2 billion (2005 chained). That hasn’t happened since 1995.

    The troubling thing is the deflator is still historically low and arguably well below the rate of inflation, which means nominal GDP didn’t exactly set the world on fire either.

    Comment by steveegg — June 26, 2013 @ 12:03 pm

  2. Good points, but I’d like to get a handle on why they’re so volatile.

    I guess instead of looking at the economy to predict GDP shortfalls or beats, we need to get a handle on farm inventories, and our work is virtually done. Zheesh.

    Also see the second update.

    Comment by Tom — June 26, 2013 @ 12:18 pm

  3. Wish I knew why farm inventories have been so volatile the last few quarters. Since 1991, it has included the change in farm materials (e.g. tractors) and supplies (e.g. fertilizer) inventories.

    I haven’t really been able to discern a pattern in the changes in terms of 2005 chained dollars (1991-1997 in Table 5.6.6A, 1997-present in Table 5.6.6B).

    Comment by steveegg — June 26, 2013 @ 12:25 pm

  4. The person I called at BEA referred me to Table 5.7.5B, where the move is from $236.3 billion to $238.2 billion.

    You’re telling me (I think) that there are a couple of items within other items considered as part of “farm” inventories in the roll-up.

    Comment by Tom — June 26, 2013 @ 12:31 pm

  5. Looking at the footnotes for that table, things keep getting curiouser and curiouser. The end-of-December to end-of-March change reflected in that table isn’t what is used for the 4Q-to-1Q GDP calculation.

    I doubt you’ll get the answers you seek from the BLS.

    Comment by steveegg — June 26, 2013 @ 12:52 pm

  6. Related; we have officially transitioned to a Fed Reserve-based economy.

    In eras past, a 25% miss high on the prediction of GDP growth would have sparked a massive sell-off. Instead, they’re up close to a full percent.

    The only reason I can figure the markets are up is the big traders figure the bad GDP news means QE will keep going forever. Of course, I could have missed some other news, but when the business wires are saying that,….

    Comment by steveegg — June 26, 2013 @ 1:17 pm

  7. You are, of course, correct. And it is, in essence, another form of tyranny.

    Comment by Tom — June 26, 2013 @ 1:43 pm

  8. Are you sure the reduction in farm inventories isn’t related to crop failures and delayed planting due to the weather? Given the selective reporting of the national MSM to hide negative narrative stories I would be inclined to believe a more organic cause and effect like a crop failure as opposed to an accounting gimmick. The Global Warming narrative can’t have crop failures due to late spring snows, flooding or early winter arrivals.

    Anecdotal local reports:

    Late planting likely
    http://www.agriculture.com/news/crops/late-plting-likely_2-ar30937

    Late planting is likely this spring as cold temperatures continue to plague the US, especially the northern US, this spring. So far planting progress is falling behind normal in nearly all crops this spring as its difficult to plant when soil temperatures as so cool. …

    …Early planting generally means above average yields are likely, but late planting generally puts the crop on the defensive right away, and requires the crop to be pollinated/blooming during the hotter portion of the summer – especially in southern areas.

    Some crops will benefit others won’t and as a result the normal production levels are affected some to the downside and some to the upside. Read the whole article very informative.

    How Late is Too Late for Corn and Soybean Planting? *** June 13, 2013***
    http://www.agweb.com/article/how_late_is_too_late_for_corn_and_soybean_planting/

    Arkansas Tomato Crop Delayed by Cold Temperatures
    http://www.andnowuknow.com/headlines/arkansas-tomato-crop-delayed-cold-temperatures

    B.C. Strawberry Crops Ravaged by Wet Weather
    http://www.andnowuknow.com/headlines/bc-strawberry-crops-ravaged-wet-weather

    Late, wet spring delays crop planting season
    http://www.nbc15.com/home/headlines/Late-wet-spring-delays-crop-planting-season-209255611.html

    Implications of abnormal spring… high corn prices -> high ethanol prices -> higher world food prices -> Arab Winter intensifying as struggling poor increasingly focus on eating to survive. Watch for more food price riots and political instability in the third world. Assad may yet lose his bid to stay in power as even his poor supporters will be demanding greater food subsidies from a cash strapped Syrian government. The Sunni opposition groups will have yet another cause to rally the Syrian public for support as Assad naturally will allow food prices to rise in an attempt to wear down the public to make them desperate with the resulting predictable backlash from the original Arab Spring. The Arab Spring started directly as a result of rising food prices due to ethanol, i.e. Obama’s community organizing which is the sowing of discontent.

    Comment by dscott — June 27, 2013 @ 9:02 am

  9. They’re showing INCREASES in inventories adding to GDP as of March. My point is that the small inventory changes somehow got a lot bigger than one would expect, even given the footnoted explanation from BEA.

    Your info points to the idea that there might be big inventory decreases in the SECOND quarter which might negatively impact GDP. If that’s the case, it won’t come in any better than 1.5%, and sub-1.0% is not out of the question.

    Comment by Tom — June 27, 2013 @ 9:13 am

  10. here’s what i wrote about that last month:

    there was, however, a rather large change in investment in inventory, and the swing within inventories was even larger; instead of adding to GDP, business inventories are now seen to have subtracted .21%, while the seasonally adjusted change in farm inventories was even greater than first estimated and contributed .84% to the GDP rate increase (that, obviously, must have been an artifact of the drought which lowered normal summer & fall inventories and distorted the seasonal change to winter farm inventories)…

    also remember that the value of the inventories went up, so although you may have had equal stores, the GDP looks at their value in billions…

    btw, you seem to be the only other person who’s noticed this; mainstream media and blogs never get past the press release..

    Comment by rjs — June 27, 2013 @ 10:09 am

  11. btw, inventories also include seed & fertilizer for next years crop, and livestock…

    Comment by rjs — June 27, 2013 @ 10:14 am

  12. Fair enough, MW666 (and thanks for the info — are these part of another line item, or already part of farm inventories?). But the figures are seasonally adjusted. So that makes one wonder what’s unusual about this “season” that would generate a 0.83-point gain in GDP all by itself?

    Comment by Tom — June 27, 2013 @ 3:39 pm

  13. Good points about the drought last year, MW666. I believe those drops didn’t take much away from GDP (relative to +0.83). Over the short-term, inventory changes should have no effect on GDP. Longer-term, because markets supposedly get more efficient in moving goods from the field to the consumer, the effect should be a tiny bit negative.

    Why no one else is looking at the detail besides you and me is beyond me.

    Comment by Tom — June 27, 2013 @ 3:45 pm

  14. i dont know where there is a line item summary of what’s included in farm inventories; i have been inquiring without suceess..

    Q1 farm inventory up $8 billion is probably unusual on its own (just guessing without checking archives)
    that makes the increase in farm inventories run from a drought related subtraction of $15.2 billion in Q4 2012 to a seasonally adjusted increase of $8.0 billion in Q1 larger than most quarterly swings in inventory overall…
    summer farm inventories took a $19.2 billion drought hit too, so anything slightly above seasonal norms in Q1 will appear monstrous vis-a-vis 2012 to whatever kind of seasonal adjustment algorithms they’re running…

    chinese arent buying the soy they were expected to, so there’s a possibily that Q2 may show a gain too…but sooner or later inventory gains must unwind; silos dont grow to the sky..

    Comment by rjs — June 27, 2013 @ 8:55 pm

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