Monday, 11 of December of 2017

Economics. Explained.  

Category » GDP

GDP

November 29, 2017

The first revision to third quarter GDP growth came in at 3.3% which compares to an initial estimate of 3.0%.  Keep in mind that the economy grew at a 3.3% pace in the third quarter despite the impact from Hurricanes Irma and Matthew which reduced growth for a short period of time.

Final sales, which is GDP excluding the change in business inventories grew at a 2.5% pace in the third quarter compared to a 2.9% rate in the second quarter.   Over the past year final sales have risen 2.2%.  In the second quarter inventories rose $39.0 billion compared to an increase of $5.5 billion in the second quarter.  Thus, inventories  added 0.8% to  GDP growth in the third quarter.  Inventories are expected to rise at roughly that same pace in the quarters ahead.

Final sales to domestic purchasers excludes both the change in inventories and trade rose 2.0% in the third quarter versus an increase of 2.7% in the second quarter.  Over the past year this series has risen at a 2.3% pace.  The deficit for net exports narrowed by $19.2 billion which means that the trade component added 0.5% to GDP growth  in the third  quarter as exports rose 2.2% while imports declined 1.1%.  The drop in imports probably represents an inability to offload merchandise in the Houston area in the wake of Hurricane Harvey.

Consumption spending rose 2.3% in the third quarter after having jumped 3.3% in the second quarter.  Growth in this category was almost certainly biased downwards by the two hurricanes and will rebound in the quarters ahead.  We expect the pace of consumer spending to remain steady and  increase 2.6% 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 4.7% in the third quarter after rising 6.7% in the second quarter and 7.2% in the first quarter.  We expect nonresidential invest to  increase 6.0% in 2017 and  6.9% in 2018 as business regains confidence in the wake of expected corporate tax cuts, relief from the currently onerous regulatory burden,  and some repatriation of earnings from overseas.

Residential investment declined 5.1% in the third quarter after having fallen 7.3% in the second quarter.   The third quarter drop was probably exacerbated by the hurricanes.  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 4.1% in 2018.

 

The foreign sector as measured by the deficit for real net exports narrowed by $19.2 billion in the third quarter to -$594.4 after having narrowed by $8.6 billion in the second quarter.  Exports rose 2.2% while imports declined by 1.1%.  We expect the deficit for net exports to neither add to nor subtract from GDP growth in 2018.

Federal government spending rose 1.3% in the third quarter after having climbed by 1.9% in the second quarter.  Federal government spending is expected to rise 0.6% in 2017 and 1.9% in 2018 as President Trump increases defense spending while non-defense spending is relatively unchanged.

We expect GDP growth of  2.6% this year, and 2.9% in 2018 given expected individual and corporate tax cuts and some repatriation of earnings from overseas.

Stephen Slifer

NumberNomics

Charleston, SC


Final Sales

November 29, 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 grew at a 2.5% pace in the third quarter compared to a 2.9% increase in the second quarter.   Over the past year final sales have risen 2.2%.  In the third quarter inventories rose $39.0 billion compared to an increase of $5.5 billion  in the second quarter.  With an increase of that magnitude inventories added 0.8% to GDP growth in the third quarter.  We expect inventories to rise by roughly that same amount in the quarters ahead.

We believe that growth will expand at a moderate pace throughout 2017.  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 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 expected individual and corporate income taxes and from some repatriation of overseas earnings.

Given all of this the economy should expand at a moderate  pace of  2.6% in 2017 and 2.9% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Final Sales to Domestic Purchasers

November 29, 2017

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 rose 2.0% in the third quarter compared to an increase of 2.7% in the second quarter.  Over the past year this series has risen at a 2.3% pace.  The deficit for net exports narrowed by $19.2 billion which means that the trade component added 0.5% to GDP growth  in the third  quarter as exports rose 2.2% while imports declined by 1.1%.  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 expected individual and corporate income tax cuts plus some repatriation of overseas earnings.

The economy should expand at a moderate 2.6% rate in 2017 and 2.0% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Gross Domestic Purchases Deflator

November 29, 2017

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 1.7% in the third quarter after having climbed by 0.9% in the second quarter. Over the past year this index has risen 1.8%.

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

However, the current rate of inflation is being biased downwards by a bidding war amongst wireless telephone companies where prices have fallen 11% in the past year.

It is also being held down by a pause in the rate of increase for prescription drugs.  President Trump promised to slow down price increases in prescription drugs by allowing U.S. consumers to purchase drugs from overseas companies and by allowing Medicare to negotiate directly with the drug companies.  As a result, drug prices have slowed from a 7.0% increase last year to about 1.0%.  However, the impact of these two categories — wireless phone prices and drug prices — should prove to be temporary.

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.   In 2017 we look for the overall CPI to increase 2.1% while the core rate rises by 1.7%.  Going forward we expect the temporary impact of phone prices and prescription drugs to be temporary,  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 both the overall and core CPI to increase 2.3% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC