Monday, 16 of July of 2018

Economics. Explained.  

Category » GDP

GDP

June 28, 2018

The final estimate of first quarter GDP came in at 2.0% versus a revised estimate of 2.2% and an initial reading of 2.3%.  GDP growth came in at a 2.9% growth rate in the fourth quarter.  For 2017 as a whole GDP rose 2.6%.  We expect GDP growth of 3.0% this year.  The downward revision in this last look at Q1 GDP was caused primarily by a reduction in the pace of inventory accumulation.

Final sales, which is GDP excluding the change in business inventories rose 2.0% in the first quarter compared to a solid 3.4%  pace in the fourth quarter.   Over the past year final sales have risen 2.7%.  In the first quarter inventories rose $13.9 billion after an increase of $15.6 billion in the fourth quarter.  Thus, inventories  had no impact on  GDP growth in the first quarter.  Inventories are expected to rise by roughly $25 billion per quarter in the quarters ahead.

Final sales to domestic purchasers excludes both the change in inventories and trade rose by 2.0% in the first quarter compared to a 4.5% growth rate in the fourth quarter.  Over the past year this series has risen at a 2.8% pace.  The deficit for net exports widened by $2.9 billion which means that the trade component has no  impact on GDP growth  in the first quarter as exports rose 3.6% while imports climbed by 3.2%.

Consumption spending rose 0.9% in the first quarter but that follows a steamy 4.0% growth rate in the fourth quarter.  We expect the pace of consumer spending to remain steady and  increase 2.4% in 2018.  Solid employment gains should boost  income.  A rebound in the stock market and an increase in house prices will boost net worth.  Expected individual income tax cuts should further stimulate spending.  Everything related to the consumer seems quite solid.

Nonresidential investment jumped by 10.4% in the first quarter which compared to a 6.8% pace in the fourth quarter.  For 2017 nonresidential investment climbed 6.3%.  We expect nonresidential investment to  increase 7.2% 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 declined 1.1% in the first quarter after having jumped 12.8% in the fourth quarter.   For 2017 as a whole residential investment rose 2.6%    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 2.4% in 2018.

The foreign sector as measured by the deficit for real net exports widened by $2.9 billion in the first quarter to -$656.8 after having widened by $56.4 billion in the fourth quarter.  Exports rose 3.6% in the first quarter while imports climbed 3.4%.  We expect the deficit for net exports to have no impact on  GDP growth at all in 2018.

Federal government spending rose 1.7% in the first quarter after having climbed by 3.2% in the fourth quarter.  Federal government spending is expected to rise 3.7% in 2018 as President Trump increases defense spending while non-defense spending is relatively unchanged.

Following GDP growth of  2.6% in 2017 we expect growth of  3.0% in 2018 given the individual and corporate tax cuts and some repatriation of earnings from overseas.

Stephen Slifer

NumberNomics

Charleston, SC


Final Sales

une 28, 2017

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 2.0% in the first quarter versus  a solid 3.4%  pace in the fourth quarter.   Over the past year final sales have risen 2.7%.  In the first quarter inventories rose $13.9 billion compared to an increase of $15.6 billion in the fourth quarter.  Thus, inventories  had no impact on  GDP growth in the first quarter.  Inventories are expected to rise by roughly $25 billion per quarter in the quarters ahead.

We believe that GDP growth will quicken from 2.6% in 2017 to 3.0% this year.  Consumers are confident.  The stock market should rebound and continue its rise later this year.  Home prices are rising.  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

June 28, 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 to domestic purchasers excludes both the change in inventories and trade rose by 2.9% in the first quarter following a 4.5% growth rate in the fourth quarter.  Over the past year this series has risen at a 2.8% pace.  The deficit for net exports widened by $2.9 billion which means that the trade component had no impact on GDP growth  in the first quarter as exports rose 3.6% while imports climbed by 3.4%.

Going forward the positive factors are that the stock market should rebound and continue its uptrend later this year.  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 relatively 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 3.0% rate in 2018 after having risen 2.6% last year.

Stephen Slifer

NumberNomics

Charleston, SC


Gross Domestic Purchases Deflator

June 28, 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 2.7% in the first quarter after having climbed by 2.5% in the fourth quarter. Over the past year this index has risen 1.9%.

Excluding the volatile food and energy components this index rose 2.6% in the first quarter after having risen 2.0% 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 is headed higher.  With the unemployment rate at 3.8% 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 2.3% in 2018.  The one 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 fallen 0.3% in the past year while prices for services have risen 2.9%.

Stephen Slifer

NumberNomics

Charleston, SC