January 26, 2018

4Q17 Gross Domestic Product, First Reading (012618): An Annualized 2.6 Percent; Upside Potential For Next Two Months’ Revisions Seems High

Filed under: Economy,Taxes & Government — Tom @ 7:05 am

Well, here we are at one of the more anticipated GDP reports I can remember. Let’s see if it’s as good as the estimators think it will be, and as the Trump White House hopes it will be.

If the reading hits or tops an annualized 3.0 percent and holds in future revisions, it will be the first time GDP has hit or topped 3.0 percent for three straight quarters since Q304-Q105.

Well take it if it happens, but if it does I’m less impressed with this result than a lot of other people.

The Obama era had several instances where the average three-quarter total of reported growth met or exceeded 3.0 percent, specifically (rounded): 3Q14-1Q15, 3.5 percent average; 2Q14-4Q14, 3.9 percent; 4Q11-2Q12, 3.1 percent; 2Q10-4Q10, 3.0 percent; 4Q09-2Q10, 3.2 percent (this was coming out of a deep recession, and as such really reflects extraordinary weakness).

One has to go back to 3Q05-1Q06 for the last Bush 43-era 3-plus percent three-quarter average (it was 3.5 percent). The Bush era had nine other 3 or 3-plus percent three-quarter average stretches in a row, covering Q103-Q303 through to Q105-Q305.

The best Bush 43-era stretch was the 5.2 percent average seen in Q203-Q403. Note that the Obama era never got anywhere close to this three-quarter average.

Though the Clinton-Gingrich GOP era certainly had much stronger and more consistent economic growth than anything we’ve seen since, it only topped the Bush 43 era’s best three-quarter performance once, turning in an average of 5.3 percent from Q298-Q498.

Predictions

There’s a really wide variance among the three estimators I usually follow, and no matter what today’s first reading is, one of these three estimates is going to end up missing by at least 0.7 points:

  • The New York Federal Reserve is at an annualized 3.94 percent. The NY Fed’s estimate hasn’t been updated since last Friday, and a lot of data has come in since.
  • The Atlanta Federal Reserve is at +3.4 percent. Relatively weak housing data in the past week didn’t dampen this estimate, as might have been expected.
  • Moody’s High-Frequency GDP Estimate, at +2.6 percent, is quite a bit lower than the other two. Moody’s also notes a CNBC economists’ consensus of +3.0 percent.

Here are a few others:

  • Bloomberg News is estimating 3.0 percent flat — “Gross domestic product expanded at a 3 percent annualized rate after 3.2 percent in the third quarter and 3.1 percent in the previous period, according to the Bloomberg survey median ahead of Commerce Department data due Friday.”
  • Late Thursday evening, the Associated Press wouldn’t commit — “The U.S. domestic product for the fourth-quarter of 2017 is due to be released Friday and is expected to show continued strong expansion of the world’s largest economy.”
  • Reuters is also at +3.0 percent.

My thinking is that the last few days’ relatively flat to bleak housing data will probably pull the result back into the low-3 percent range to maybe 3.2 percent. If November-December data coming in during the next six weeks or so continues that flatness, subsequent revisions may pull the result down to 3.0 percent or slightly lower. Obviously, I’d like to be wrong.

Potentially countering that concern is the fact that a lot of initially weak data has been subsequently revised up since Donald Trump became president (a key example with retail sales is here). That means the hit from the next two revisions may not be significant, or may not happen. We’ll just have to see.

The report will be here at 8:30 a.m.

HERE IT IS: Disappointing, pending a closer look (full report with tables) —

Real gross domestic product (GDP) increased at an annual rate of 2.6 percent in the fourth quarter of 2017, according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.2 percent.

The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency. The “second” estimate for the fourth quarter, based on more complete data, will be released on February 28, 2018.

The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, exports, residential fixed investment, state and local government spending, and federal government spending that were partly offset by a negative contribution from private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP growth in the fourth quarter reflected a downturn in private inventory investment that was partly offset by accelerations in PCE, exports, nonresidential fixed investment, state and local government spending, and federal government spending, and an upturn in residential fixed investment. Imports, which are a subtraction in the calculation of GDP, turned up.

Current-dollar GDP increased 5.0 percent, or $238.3 billion, in the fourth quarter to a level of $19,738.9 billion. In the third quarter, current-dollar GDP increased 5.3 percent, or $250.6 billion.

The price index for gross domestic purchases increased 2.5 percent in the fourth quarter, compared with an increase of 1.7 percent in the third quarter (table 4). The PCE price index increased 2.8 percent, compared with an increase of 1.5 percent. Excluding food and energy prices, the PCE price index increased 1.9 percent, compared with an increase of 1.3 percent.

Personal Income

Current-dollar personal income increased $178.9 billion in the fourth quarter, compared with an increase of $112.3 billion in the third. The acceleration in personal income primarily reflected an upturn in personal interest income and an acceleration in nonfarm proprietors’ income.

Disposable personal income increased $139.0 billion, or 3.9 percent, in the fourth quarter, compared with an increase of $73.8 billion, or 2.1 percent, in the third. Real disposable personal income increased 1.1 percent, compared with an increase of 0.5 percent.

Personal saving was $384.4 billion in the fourth quarter, compared with $478.3 billion in the third. The personal saving rate — personal saving as a percentage of disposable personal income — was 2.6 percent in the fourth quarter, compared with 3.3 percent in the third.

2017 GDP

Real GDP increased 2.3 percent in 2017 (that is, from the 2016 annual level to the 2017 annual level), compared with an increase of 1.5 percent in 2016.

Components

Here’s the components worksheet, which will obviously be updated shortly after the release happens:

GDPcomponentsThru4Q17at012618

Focusing on the highlighted figures:

  • The GDP contribution for PCE-Goods is the highest since Q106, i.e., in 12 years.
  • The GDP contribution for PCE-Overall is the highest since Q414, though Q216 was almost identical. The services component wasn’t particularly strong.
  • The inventory change component swung 1.46 point from the third to fourth quarter. This change doesn’t seem to be supported by the underlying data, which shows all inventories increasing during the first two months of the quarter, and durable goods up to today’s December release increase by about 1 percent (which would annualize to 4.0 percent in the GDP report).
  • Also, today’s durable goods report showed that orders increased in December by 2.9 percent following an upwardly revised 1.7 percent (from +1.3 percent) in November; these are single-month, seasonally adjusted increases which are pretty impressive. Pending later revisions for December, 4Q17 durables orders are 7.3 percent greater than they were in 4Q16, and 4.0 percent greater than 3Q17 (which would annualize to over 16 percent in when considered in an annualized-basis GDP report). The story is less positive but still quite positive with shipments: up 6.2 percent from 4Q16 to 4Q17, and up 2.6 percent (over 10.5 percent annualized) from 3Q17 to 4Q17.
  • On the downside, it’s pretty clear that most of the increase in goods bought by consumers were imports, and that result dwarfed the otherwise pretty impressive improvement in exports.

The fixed investment numbers (other than inventory change) were pretty impressive.

I have a real problem with the 2.5 percent deflator, which seems artificially high by about a half-point. Given the hostility in the federal bureaucracy towards the Trump White House, it would be foolish to totally dismiss the possibility that there might be some data-cooking going on here.

When all is said and done, I would not be surprised if future revisions are going to bump the fourth quarter’s final result either very close to or slightly above 3.0 percent. It seems like there’s very little chance that today’s figure is going to come down in future revisions — especially if the GDP deflator comes in lower in future reports, as I think it should.

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2 Comments

  1. The revisions will exceed the 2.6
    “should be noted that foreign manufacturers (think Samsung) fully anticipated a tough year for them in the face of President Trump’s policies to level trade imbalances. There is actual evidence many Asian companies, specifically Samsung and LE, shipped massive amounts of parts into the U.S. in advance of this year. Commerce Secretary Wilbur Ross spoke to this at Davos.” Blogpost on The Conservative Treehouse titled “Did B.E.A. sandbag report on 4th Qtr US GDP?”

    Comment by JCW — January 28, 2018 @ 11:39 am

  2. (slightly revised after original posting)

    Hi, JCW. Thanks for the comment.

    I read the CTH post on Saturday myself. Raises good points, but I don’t’ think this is one of them.

    Don’t see how this imports issue affects GDP as defined (“the value of the goods and services produced by the U.S. economy in a given time period”):

    https://www.bea.gov/national/pdf/nipa_primer.pdf

    Moving “parts” (i.e., NOT finished goods, assuming Sundance was careful in his wording) into the country faster without sending them into production, which the news cited implies was done, doesn’t affect what was produced in any way and shouldn’t be a negative GDP hit (but it may, because of data-collection shortcomings).

    If the “parts” amounts imported in advance are “massive” enough and have been detected or included in imports, they probably haven’t been detected in the private inventories change, which would then be less than the -0.67-point effect reported, and would cause originally reported GDP to go UP.

    If the imports haven’t been detected, then that number will go more negative, but will be offset by the private inventories effect just described, and there will be no effect on GDP.

    But whether the government reports will detect any of this, or report it properly, in the two revisions is an open question.

    Comment by Tom — January 28, 2018 @ 11:56 am

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