Friday, August 1, 2014

Where's the economy at? GDP version

This week featured the first look at the 2nd Quarter GDP numbers in 2014. As usual, it was an attention-grabber, perhaps even more so after the shocking decline in GDP in Q1. So what'd we find out?

Well, we found out that real GDP grew by 4.0% in the Spring- a strong bounce back, especially with the increase in investment (which makes up from the weather-related drop due to the polar vortex winter). This puts growth for all of 2014 to a positive (albeit weak at around a 1% annual rate), and the year-over-year increase is in line with the last 2 ½ years at 2.4%. In fact, the Bureau of Economic Analysis notes that quarterly growth has been at a 2.1% annual rate since the current expansion began 5 years ago- and it’s been remarkably steady at those levels if not spectacular. Consumption is still decent, but not mid-2000s “spend as much as what’s coming in” either, as the savings rate is at a robust 5.3%. It seems people have learned a lesson from the 2000s fake housing and stock boom, and are still more cautious with plunging into big things. While that's a bad thing for GDP, it's probably a good thing for society.

Worth worrying about is that 1.66% of the 4.0% increase is due to added inventories. While that offsets the decrease in inventories we saw over the last 6 months, it means the underlying growth was only 2.34%, so those items better be getting sold in the coming months. That being said, 2.34% is "final sales GDP" is generally in the ballpark of what we did in 2012 and the first part of 2013 before things picked up at the end of the year, and then hit the vortex in Q1 2014.

So the question is whether growth stays at Q2’s levels in the later part of the year, and if the strong job growth of the first half of 2014 keeps up. The Wisconsin Legislative Fiscal Bureau predicted a real GDP increase of 2.7% for this year when it made its revenue estimates in January (and the state’s projected budget surplus was as high as it was in no small part because of this planned growth). For that to hold up, we’d need growth of around 4.4% in the second half of this year- an amount we haven’t had in a full year since the full-employment, dot-com boom times of 1999. While we’re consistently creating jobs at a rate not seen since the Clinton years and the height of the housing boom of the mid-2000s, I’d have a hard time buying that we’d match that kind of GDP growth for GDP in the second part of this year, which means those LFB projections would fall short.

The report also included revisions to prior year numbers, which led to some intriguing finds. The BEA says the last 3 years in particular had a few changes, which left total economic growth a bit smaller than we originally thought.
The percent change in real GDP was revised down 0.2 percentage point for 2011, was revised down 0.5 percentage point for 2012, and was revised up 0.3 percentage point for 2013.
Interestingly, this also meant that the polar vortex–related decline in Q1 2014 GDP wasn’t as much as first thought, only down 2.1% vs the -2.9% we saw "finalized" last month. Also interesting is that there were upward revisions in the last 2 quarters of 2013 in particular- with growth now reported at 4.1% in Q3 and 3.5% in Q4. This makes the decline at the start of 2014 look all the more like a weather-related pause than any sort of harbinger of recession.

In all, it's a better than expected GDP report, and combined with the 0.7% increase in employee compensation costs for Q2 2014, (the highest since 2008) it led to a jump in 10-year Treasury notes from 2.46% to 2.56% between Tuesday and Thursday, amid speculatation that the Federal Reserve might let off the monetary gas sooner than later. The bond yields retreated a bit today (to 2.51%), but Wall Street certainly is getting spooked by all this good economic news for Main Street. The Dow Jones Industrial Average dropped 317 points on Thursday, went down nearly 70 more today, and dumped nearly 500 points off of Monday's close. Maybe this is just a correction from the run-up we’ve had in recent months (the Dow is basically flat for the year, even with this week's losses), but it's an interesting contrast to what the GDP and related economic reports have given some interesting hints on where this economy is, and where it might be going.

I'll have more this weekend on today's jobs report (generally good at 209,000 total, and 198,000 private sector), but I'll leave you with this GDP taster for now.

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