July 30, 2014

2Q14 Gross Domestic Product (1st Take) and Comprehensive Revision: An Annualized 4.0%; 1Q14 Revised to a 2.1% Contraction

Filed under: Economy,Taxes & Government — Tom @ 8:50 am

Moved to the top after original post time of about 7:30 this morning. See Updates below.

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Predictions: There weren’t any at two of the major wires as of midnight, but now there are —

  • Associated Press — in a triumphal writeup, Martin Crutsinger is confident that the “US ECONOMY LIKELY SHOWED BIG REBOUND LAST QUARTER.” Specifically, “The consensus forecast is that the economy expanded at an annual rate of 2.9 percent, according to a survey of economists by data firm FactSet.” Several readers and commenters during past month have pointed out that this result would not bring us to breakeven for the year; the reading needs to be a bit above 3.0 percent before rounding to do that. Crutsinger is still beating the snot of the “bad weather” excuse for the first quarter.
  • Bloomberg News — “GDP probably rose at a 3 percent annual rate in the second quarter following a 2.9 percent slump in the first …”

Reuters, as noted last night, carried a prediction of 3.0 percent.

UPDATE: Business Insider has this paragraph:

The Bureau of Economic Analysis will release GDP data at 8:30 a.m. Consensus is for a reading of 2.9% annualized. Deutsche Bank’s Joe LaVorgna, who is predicting 4.2%, has explained why he thinks it could be even higher: “Current data imply that Q1 productivity fell at an astounding -5.8% annualized rate, which would be the largest decline since Q3 1947 when productivity plunged by an all-time record amount of -11.2% in the quarter. Productivity then rebounded an even more remarkable +17.8% in the following quarter. In the context of a sharp downward revision to Q1 productivity, our estimate of just a +0.4% rebound in Q2 is extremely modest. If anything, the payback should be much larger, thereby implying even more economic output than what we project.”

Making a call here is especially tough because the prior-year revisions, up to and including the first quarter of this year, mean that this quarter’s reported starting point is different. So I’m going to go with an estimate for the first half of 2014.

I think that the sum of the first and second quarters reported today will be an annualized -1.0 percent, which is one percentage point below the consensus implied in today’s quarterly prediction that we’re just barely short of breakeven.

One thing to note about today’s result: Based on how the first quarter’s figure went from +0.1 to -1.0 to -2.9 in successive releases, it’s certainly won’t be the last word. Not that it will stop anyone in the press from doing so, but there should be no premature celebrating if the news is good.

The report will be here at 8:30 a.m. My analysis will be somewhat delayed, because I’ll be sitting in on ADP’s conference call from 8:30-9. That report’s chief economist has been a jobs-GDP booster for several quarters, so I certainly want his immediate reax to whatever news comes out.

HERE IT IS (permanent full text link) Well, as noted, it’s only Round 1, but we sure missed on the prediction (we’ll see what it looks like two months from now) —

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 4.0 percent in the second quarter of 2014, according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter,
real GDP decreased 2.1 percent (revised).

The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3 and “Comparisons of Revisions to GDP” on page 10). The “second” estimate for the second quarter, based on more complete data, will be released on August 28, 2014.

The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

More later, after I sit in on the ADP converence call.

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UPDATE: I’m going to concentrate on the first half of this year for now, and look at the comprehensive revision in a separate post.

First, let’s look at what happened to the first quarter:

1QrevVs0625on073014

The reduced contraction came from smaller declines in inventories and increased fixed investment in structures.

Now let’s look at 2nd quarter vs. the revised first:

1QrevVs2Q14on073014

So the bounceback in personal consumption expenditures was indeed pretty weak, given the “weather-driven” weak first quarter. My guess is that it’s going to come in a bit weaker overall in subsequent revisions, with goods coming down, and services coming up, but not by as much.

On the investment side, the “other” category in nonresidential fixed has the highest contribution to GDP (0.30 points) in all of the quarters listed in the report (going back to Q410). What’s in there? Well, I don’t know, because it’s not detailed at the “expanded” Table 1.5.2, which at least shows that it’s been 5 years since we’ve seen a contribution that great. The fixed residential turnaround is probably positive, but it doesn’t seem like it should be as positive as 0.23 points, given the awful June new-home sales and pending sales reports released during the past week.

The big positive inventory change, combined with the big negative in imports (the higher imports are, the worse it is for reported GDP growth), might lead one to believe that U.S. manufacturers produced a whole lot of stuff which consumers chose to instead buy from other countries. If so .. uh-oh.

The 0.30-point contribution of increased spending at state governments is not exactly desirable, given that it’s likely an increase in bureaucratic bloat and not substantive economic improvement.

So overall, the 4.0% annualized number is nice if it holds, but I don’t think it will (let’s not forget what happened to health care spending as the first quarter’s revisions came out). Depstie the nice overall number, it was still a pretty soft result for what was supposed to be a great “rebound from bad weather” quarter.

With the left’s darling economy driver of consumption coming in at a pretty low contribution level, you might think they’ll mute their celebrating a bit. You can bet they won’t.

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5 Comments

  1. 15-year revision? Didn’t we just have a comprehensive revision going back to 1929?

    If it weren’t for revisions, I would have gone with a net -3.8% for the first half. However, the revisions will be enough to drag that number up, especially since they’re going back to 1999.

    Comment by steveegg — July 30, 2014 @ 8:22 am

  2. That’s what Reuters report said last night. It surprised me, as it was teh first time I saw any indication of going back that far.

    Comment by Tom — July 30, 2014 @ 8:30 am

  3. This +4.0% (with 1Q revised to -2.1% and 1Q dollar amounts higher than previously reported) is completely unsupported by the monthly data.

    I’m surprised ZeroHedge hasn’t ripped this bunch of Bravo Sierra to shreds.

    Comment by steveegg — July 30, 2014 @ 8:54 am

  4. They’re probably working on it.

    Comment by Tom — July 30, 2014 @ 8:55 am

  5. Looks like someone is manufacturing a recovery via a paper shuffle.

    Comment by dscott — July 31, 2014 @ 10:06 am

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