Sunday, 30 of April of 2017

Economics. Explained.  

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GDP

April 28, 2017

The first estimate of first quarter GDP growth came in at 0.7% which was weaker than the 1.5% growth rate that had been expected.  That compares to a 2.1% pace in the fourth quarter.  This is the first look at first quarter growth.  This estimate will be revised twice more at the end of both May and June.

Final sales, which is GDP excluding the change in business inventories grew at a 1.6% pace in the first quarter compared to a 1.1% rate in the fourth quarter .   Over the past year final sales have risen 2.1%.  In the first quarter inventories as rose $10.3 billion compared to an increase of $49.6 billion in the fourth quarter.  Thus, inventories subtracted 1.0% from GDP growth in the first quarter.

Final sales to domestic purchasers excludes both the change in inventories and trade rose 1.5% in the first quarter versus an increase of 2.8% in the fourth quarter.  Over the past year this series has risen at a 2.2% pace.  The deficit for net exports narrowed by $2.3 billion which means that the trade component added 0.1% to GDP growth  in the first  quarter as exports rose 5.8% while imports climbed by 4.1%.

Consumption spending climbed by just 0.3% in the first quarter versus an increase of 3.5% in the fourth quarter.  Consumers took a breather in the first quarter but it is not expected to last.  We expect consumer spending to increase 2.2% pace in 2017.  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 despite the first quarter weakness.

Nonresidential investment jumped 9.4% in the first quarter after having climbed by 0.9% in the fourth quarter.  We expect nonresidential invest to  increase 4.5% in both 2017 and  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 jumped 13.7% in the first quarter after having climbed 9.6% in the fourth quarter.   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 6.4% in 2017.

The foreign sector as measured by the deficit for real net exports narrowed by $2.3 billion in the first quarter after having widened by $82.8 billion in the fourth quarter.  Exports rose 5.8% while imports rose by 4.1%.  We expect the deficit for net exports to widen slightly this year and subtract 0.3% from GDP growth in 2017.

Federal government spending declined by 1.9% in the first quarter after having fallen 1.2% in the fourth quarter.  Government spending is expected to rise 0.7% in 2017 as President Trump increases defense spending while non-defense spending rises slightly.

We expect growth of  2.1% this year, and 2.7% in 2018 given expected individual and corporate tax cuts and some repatriation of earnings from overseas.

Stephen Slifer

NumberNomics

Charleston, SC


Final Sales

April 28, 2016

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.  In the first quarter final sales rose 1.6% after having risen 1.1% in the fourth quarter.  Given that GDP growth in the first quarter was 0.7%, the change in business inventories subtracted 0.9% from  GDP growth in the first quarter.

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  2.1% in 2017 and 2.7% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Final Sales to Domestic Purchasers

April 28, 2016

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 to domestic purchasers.

Final sales to domestic purchasers rose 1.5% in the first quarter after having climbed 2.8% in the fourth quarter.  The deficit for real net exports narrowed by $2.3 billion in the first quarter as exports rose 5.8% while imports climbed by 4.1% .  The widening of the trade gap means that the trade component added  0.1% to GDP growth in the first quarter.  However, the gradual widening of the trade gap should subtract about 0.3% from GDP growth this year.

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 2.1% in 2017 and 2.7% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Gross Domestic Purchases Deflator

April 28, 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 2.6% in the first quarter after having risen 2.0% in the fourth quarter. Over the past year this index has risen 2.0%.

Excluding the volatile food and energy components this index rose 2.3% in the first quarter after having risen 1.6% 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.   In 2017 we look for the overall CPI to increase 2.4% while the core rate also rises by 2.4%.  Oil prices should increase slightly, rents will continue to climb, medical costs will surge, and with the economy at full employment wages will begin to climb and lead to higher prices.

Stephen Slifer

NumberNomics

Charleston, SC