Thursday, 22 of February of 2018

Economics. Explained.  

Category » GDP

GDP

January 26, 2018

The first look at fourth quarter GDP growth came in at 2.6% which was a bit less than the 3.0% pace that had been expected.  However, the shortfall was confined to the change in business inventories which are very volatile from one quarter to the next.  The 2.6% fourth quarter GDP increase compares to a 3.2% growth rate in the third quarter.  Keep in mind that this early GDP estimate will be revised two more times, once at the end of next month, and again at the end of March.  For 2017 as a whole GDP rose 2.5%.

Final sales, which is GDP excluding the change in business inventories grew at a solid 3.2% pace in the fourth quarter compared to a 2.4% rate in the third quarter.   Over the past year final sales have risen 2.8%.  In the fourth quarter inventories rose $9.2 billion compared to an increase of $38.5 billion in the third quarter.  Thus, inventories  subtracted 0.6% from  GDP growth in the fourth quarter.  Inventories are expected to rise by roughly $27 billion per quarter in the quarters ahead.

Final sales to domestic purchasers excludes both the change in inventories and trade jumped by 4.3% in the fourth quarter versus an increase of 1.9% pace in the third quarter.  Over the past year this series has risen at a 2.8% pace.  The deficit for net exports widened by $55.1 billion which means that the trade component subtracted 1.1% from GDP growth  in the fourth  quarter as exports rose 6.9% while imports surged by 13.9%.  The jump in imports probably represents a rebound following an inability to offload merchandise in the Houston area in the third quarter in the wake of Hurricane Harvey.

Consumption spending rose 3.8% in the fourth quarter after having risen 2.2% in the third quarter.  Growth in this category was almost certainly biased downwards in the third quarter by two hurricanes followed by a rebound in the fourth quarter.  We expect the pace of consumer spending to remain steady and  increase 2.8% in 2018.  Solid employment gains should boost  income.  The rising stock market will boost net worth.  Expected individual income tax cuts should further stimulate spending.  Everything related to the consumer seems quite solid.

Nonresidential investment climbed by 6.8% in the fourth quarter after rising 4.7% in the third quarter.  For 2017 nonresidential investment climbed 6.3%.  We expect nonresidential investment to  increase  7.0% in 2018 as business regains confidence in the wake of expected corporate tax cuts, relief from an onerous regulatory burden,  and some repatriation of earnings from overseas.

Residential investment jumped 11.1% in the fourth quarter after having declined 4.7% in the third quarter.   The third quarter drop was probably exacerbated by the hurricanes and the fourth quarter reflects the rebound.  For 2017 as a whole residential investment rose 2.3%    While demand remains strong, builders are having an increasingly difficult time finding qualified workers which curtails growth in this category.   We expect residential investment to  increase 3.5% in 2018.

The foreign sector as measured by the deficit for real net exports widened by $55.1 billion in the fourth quarter to -$652.6 after having narrowed by $16.1 billion in the third quarter.  Exports rose 6.9% while imports jumped by 13.9%.  We expect the deficit for net exports to neither add to nor subtract from GDP growth in 2018.

Federal government spending rose 3.5% in the fourth quarter after having risen 1.3% in the third quarter.  Federal government spending is expected to rise 1.8% in 2018 as President Trump increases defense spending while non-defense spending is relatively unchanged.

Following GDP growth of  2.5% in 2017 we expect growth of  2.9% in 2018 given the individual and corporate tax cuts and some repatriation of earnings from overseas.

Stephen Slifer

NumberNomics

Charleston, SC


Final Sales

January 26, 2018

When the economy is slowing down, firms will accumulate unwanted inventories.   Those inventories still show up in GDP, but they are unsold.  Hence, GDP will be biased upwards.  Similarly, in good times businesses will reduce inventory levels to satisfy demand.  In this case, GDP growth will be understated.

To get a sense of the underlying pace of sales, economists will look at final sales which is GDP less the change  in business inventories.  Final sales grew at a 3.2% pace in the fourth quarter after having risen 2.4% pace in the third quarter.   Over the past year final sales have risen 2.8%.  In the fourth quarter inventories rose $9.2 billion after having climbed $38.5 billion in the third quarter.  As a result inventories subtracted 0.6% from GDP growth in the third quarter.  We expect inventories to rise by about $27 billion per quarter in the quarters ahead.

We believe that GDP growth will quicken from 2.5% in 2017 to 2.9% this year..  Consumers are confident.  The stock market is close to another record high level.  Job growth is increasing.  The unemployment rate continues to decline slowly. Oil prices remain relatively low.  Inventories remain lean.  Corporations are making steady profits.  They have a ton of cash.  Interest rates are going to remain low for another year.  Plus, the economy should receive some stimulus from the individual and corporate income tax cuts and from some repatriation of overseas earnings.

Stephen Slifer

NumberNomics

Charleston, SC


Final Sales to Domestic Purchasers

January 26, 2018

It is important to remember that final sales is a measure of how many domestically produced goods are sold each quarter.  But we also sell goods overseas — our exports.   And we purchase goods from other countries — our imports.

In the never-ending process of analyzing the GDP data, there is yet another series called “final sales to domestic purchasers” which measures how much U.S. residents are actually spending.  It starts with final sales, but then subtracts exports (which represents how much foreigners are buying from the U.S.) and adds imports (which represents how much U.S. residents are spending on imports).  The end result is a measure of sales by domestic purchasers.

Final sales by domestic purchasers jumped by 4.3% in the fourth quarter after having risen 1.9% in the third quarter.  Over the past year this series has risen at a 2.8% pace.  The swings in growth between the two quarters reflect an inability to offload imported goods in the the Houston area in the third quarter in the wake of two hurricanes, and a  subsequent rebound in Q4.  The deficit for net exports widened by $55.1 billion in the fourth quarter which means that the trade component subtracted 1.1% from GDP growth  in that fourth  quarter as exports rose 6.9% while imports surged by 13.9%.  We expect the deficit for net exports to neither add to nor subtract from GDP growth in 2018.

Going forward the positive factors are that the stock market remains close to another record high level.  The consumer is confident.  Consumers have record net worth.  Interest rates remain low.  The economy is creating a reasonable number  of new jobs.  The unemployment rate continues to decline slowly,  oil prices remain low, the housing sector is expanding nicely, and income is rising.  Furthermore, corporations are making steady profits, have a ton of cash, and corporate interest rates remain low.  Finally, the economy should receive some  stimulus from the individual and corporate income tax cuts plus some repatriation of overseas earnings.

The economy should expand at a 2.9% rate in 2018 after having risen 2.5% last year.

Stephen Slifer

NumberNomics

Charleston, SC


Gross Domestic Purchases Deflator

January 26, 2018

There are many different deflators that are available.  This one is for gross domestic purchases which measures prices paid by U.S. residents.  It is the one measure of inflation that the Commerce Department talks about when it releases the GDP report.   It is our broadest measure of inflation and contains more than 5,000 goods and services.

The gross domestic purchases deflator rose 2.5% in the fourth quarter after having climbed 1.7% in the third quarter. Over the past year this index has risen 1.9%.

Excluding the volatile food and energy components this index rose 1.9% in the fourth quarter after having risen 1.7% in the third quarter and 1.3% in the second quarter.

Remember that these deflators are weighted measures of inflation.  That means that when a builder switches from using copper pipe to PVC to save money, it registers as a price decline in these particular inflation measures.  Or when a consumer switches from buying butter to less expensive margarine the result is the same.  Thus, the deflator represents a combination of price changes and changes in consumer and business behavior.

The CPI, however, is a fixed basket of goods and services.  So what it shows are price changes only which, to us, is what inflation is all about.   We believe that the inflation rate is headed higher.  With the unemployment rate at 4.1% the economy is at full employment which should boost wages and, at last, that seems to be happening.  Both manufacturers and non-manufacturing firms are reporting sharply higher prices for their raw materials so commodity prices are also on the rise.  A very short supply of available rental properties is boosting rents.  Hence we expect  the core CPI to climb from 1.8% last year to 2.2% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC