Tuesday, 16 of July of 2019

Economics. Explained.  

Category » GDP

GDP

June 27, 2019

The final estimate of first quarter GDP growth came in at 3.1% which is the same as last month’s revised reading and compares to the initial reading of 3.2%.  Given that much of that gain was attributable to an outsized increase in inventory accumulation, second quarter GDP growth should be weaker.  We look for a Q2 growth rate of 1.5%.  For 2018 as a whole GDP rose 3.0%.  We  expect GDP growth of 2.6% in 2019.

Final sales, which is GDP excluding the change in business inventories rose 2.6% in the first quarter after having risen 2.1% in the fourth quarter.   Over the past year final sales have risen 2.7%.  In the first quarter inventories  jumped $122.8 billion after having climbed $96.8 billion  in the fourth quarter. Thus, inventories  added 0.6% to GDP growth in the first quarter but, as noted earlier, the outsized increase in the first quarter will be largely offset in the quarters ahead.  For example, inventories are expected to rise $55.0 billion in the second quarter and  roughly $70 billion per quarter in the final two quarters of the year.

Final sales to domestic purchasers excludes both the change in inventories and trade rose by 1.6% in the first quarter after having risen 2.1% in the fourth quarter.  In the first quarter the deficit for net exports shrank by $52.1 billion from $955.7 billion to $905.0 billion.   In that quarter exports jumped 5.4% while imports fell by 1.9%.  Given that final sales to domestic purchasers rose 1.6% while final sales rose 2.6%,  it is clear that the trade component added 1.0% to GDP growth in the first quarter.  Over the past year this series has risen at a 2.7% pace.

Consumption spending slowed to 0.9% in the first quarter after having risen 2.5% in the fourth quarter.  But given the stock market meltdown late last year and the additional negative impact caused by the prolonged government slowdown, this result was not surprising.  But consumers have jumped back into action and we anticipate a 3.3% increase in consumer spending in the second quarter.  Steady employment gains of about 180 thousand per month continue to boost  income.  The consumer has little debt.  And interest rates remain relatively low.  Everything related to the consumer seems quite solid.  We expect growth in consumer spending of 2.3% this year.

Nonresidential investment rose 4.4% in the first quarter after having risen 5.4% in the fourth quarter.  It slowed in the first quarter for the same reason that consumption spending slowed — the stock market decline and the government shutdown.  We expect nonresidential investment to climb 6.0% in the second quarter.  For 2018 nonresidential investment climbed 7.0%.  We expect nonresidential investment to  increase  5.8% in 2019 as corporate tax cuts, relief from an onerous regulatory burden,  and some repatriation of earnings from overseas contribute to the run-up.

Residential investment fell by 2.0% in the first quarter after having declined 4.7% in the fourth quarter.   But sales appear to have bounced back sharply late in the first quarter and we expect this category to climb 2.0% in the second quarter.  For 2018 as a whole residential investment declined 3.3%    While demand has strengthened considerable in the past couple of months,  builders are having a difficult time finding qualified workers which curtails growth in this category.   Nevertheless, we expect residential investment to climb 1.0% in 2019.

The foreign sector as measured by the deficit for real net exports,  shrank by $50.7 billion in the first quarter from $955.7 billion to $905.0 billion.   In that quarter exports jumped 5.4% while imports fell by 1.9%.  We expect the deficit to widen slightly for the balance of the year.  If that is the case the trade component will add 0.2% to GDP growth in 2019.

Federal government spending was unchanged in the first quarter after having risen 1.1% in the fourth quarter.  We expect Federal government spending to rise 2.4% this year as defense spending rises sharply while non-defense spending declines by a moderate amount.

Following GDP growth of  3.0% in 2018 we expect growth of  2.6% in 2019.

Stephen Slifer

NumberNomics

Charleston, SC


Final Sales

June 27, 2019

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, rose 2.6% in the first quarter after having risen 2.1% in the fourth quarter.   Over the past year final sales have risen 2.7%.  In the first quarter inventories  jumped $122.8 billion after having climbed $96.8 billion in the fourth quarter.  Thus, inventories  added 0.5% to GDP growth in the first quarter but the outsized increase in the first quarter will be largely offset in the quarters ahead.  For example, inventories are expected to rise $55.0 billion in the second quarter and  roughly $70 billion per quarter in the final two quarters of the year.

We believe that GDP growth will be 2.6% in 2019 after having risen 3.0% last year.  Consumers are confident.  The stock market has recovered all of its fourth quarter loss which will boost net worth.  Home prices are rising very slowly.  Job growth is increasing.  The unemployment rate continues to decline slowly.  Corporations are making steady profits.   Interest rates are likely to be unchanged for the foreseeable future  Plus, the economy should continue to receive some stimulus from individual and corporate income tax cuts and from some repatriation of overseas earnings.

Stephen Slifer

NumberNomics

Charleston, SC


Final Sales to Domestic Purchasers

June 29, 2019

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 to domestic purchasers excludes both the change in inventories and trade rose by 1.6% in the first quarter after having risen 2.1% in the fourth quarter.  In the first quarter the deficit for net exports shrank by $50.7 billion from $955.7 billion to $905.0 billion.   In that quarter exports jumped 5.4% while imports fell by 1.9%.  Given that final sales to domestic purchasers rose 1.6% while final sales rose 2.6%,  it is clear that the trade component added 1.0% to GDP growth in the first quarter.  Over the past year this series has risen at a 2.7% pace.

Going forward the stock market should continue to climb which will boost net worth.  The consumer is confident.  Interest rates are going to be steady at least through midyear.  The economy is creating a reasonable number  of new jobs.  The unemployment rate continues to decline slowly.  Income is rising.  Furthermore, corporations are making steady profits.  Finally, the economy should continue to receive some  stimulus from the individual and corporate income tax cuts plus some repatriation of overseas earnings.

The economy should expand at a  2.6% pace in 2019 after rising 3.0% last year.

Stephen Slifer

NumberNomics

Charleston, SC


Gross Domestic Purchases Deflator

June 27, 2019

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 0.8% in the first quarter after having climbed 1.7% in the fourth quarter. Over the past year this index has risen 1.7%.

Excluding the volatile food and energy components this index rose 1.3% after having risen 1.8% in the fourth 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 will inch upwards in 2019.  With the unemployment rate at 3.8% the economy is at full employment which should boost wages.  However, much of the upward pressure on wages is being offset by an increase in productivity.  A very short supply of available rental properties is boosting rents and helping to push inflation higher.  Oil prices fell sharply in the fourth quarter and have rebounded, but should be fairly steady for the balance of the year.    One other thing that is keeping the inflation rate in check is technology.  People are able to search the internet and find the lowest price available from Amazon or some other on-line website.  Thus, sellers of goods have absolutely no pricing power.  Prices of goods have declined 0.2% in the past year while prices for services have risen 2.8%.  Hence we expect  the core CPI to climb  2.3% this year after having risen 2.2% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC