Thursday, 15 of November of 2018

Economics. Explained.  

Category » GDP

GDP

October 26, 2018

The first estimate of third quarter GDP came in at 3.5% compared to 4.2% growth rate in the second quarter.  For 2017 as a whole GDP rose 2.5%.  We expect GDP growth of 3.0% this year and 2.9% in 2019.

Final sales, which is GDP excluding the change in business inventories slowed to 1.4% in the third quarter after having surged 5.4% in the second quarter.   Over the past year final sales have risen 3.0%.  In the third quarter inventories  climbed $76.3 billion after having actually declined  $36.8 billion in the second quarter.  Thus, inventories  added 2.1% to GDP growth in the third quarter.  Inventories are expected to rise by roughly $42 billion per quarter in the quarters ahead.

Final sales to domestic purchasers excludes both the change in inventories and trade rose by 3.1% in the third quarter after having risen 4.0% in the second quarter.  Over the past year this series has risen at a 3.3% pace.  The deficit for net exports widened by $98.0 billion in the third quarter after having narrowed by $61.4 billion in the second quarter which means that the trade component subtracted 1.7% from GDP growth in the third quarter after having added 1.4% to GDP growth in the second quarter.  In the third quarter exports declined 3.5% while imports surged by 9.1%.

Consumption spending rose 4.0% in the third quarter after having risen 3.8% in the second quarter.  We expect the pace of consumer spending to remain steady and  increase 2.9% this year and 2.6% in 2019.  Solid employment gains should boost  income.  An expected 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 rose just 0.8% in the third quarter after  having climbed by 8.7% in the second quarter.  For 2017 nonresidential investment climbed 6.3%.  We expect nonresidential investment to  increase  6.8% in 2018 and 6.5% 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 declined 4.0% in the third quarter after having declined 1.3% in the second quarter and 3.4% in the first quarter.   For 2017 as a whole residential investment rose 3.8%    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 decline 2.2% in 2018 and be unchanged in 2019.

The foreign sector as measured by the deficit for real net exports widened by $98.0 billion in the third quarter to -$939.0 billion after having narrowed by $61.4 billion in the second quarter.  Exports declined 3.5% in the third quarter while imports surged by 9.1%.  We expect the deficit for net exports to have no impact on GDP growth this year and subtract 0.1% from GDP growth in 2019.

Federal government spending rose 3.3% in the third quarter after having risen 3.7% in the second quarter.  Federal government spending is expected to rise 3.4% in 2018 as President Trump increases defense spending while non-defense spending is relatively unchanged.  Look for a further increase of about 3.5% in 2019.

Following GDP growth of  2.5% in 2017 we expect growth of  3.0% in 2018 given the individual and corporate tax cuts and some repatriation of earnings from overseas, and 2.9% in 2019.

Stephen Slifer

NumberNomics

Charleston, SC


Final Sales

October 26, 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 slowed to 1.4% in the third quarter after having surged 5.4% in the second quarter.   Over the past year final sales have risen 3.0%.  In the third quarter inventories  climbed $76.3 billion after having actually declined  $36.8 billion in the second quarter.  Thus, inventories  added 2.1% to GDP growth in the third quarter.  Inventories are expected to rise by roughly $42 billion per quarter in the quarters ahead.

We believe that GDP growth will quicken from 2.5% in 2017 to 3.0% this year and 2.9% in 2019.  Consumers are confident.  The stock market should rebound and thereby boost net worth.  Home prices are rising.  Job growth is increasing.  The unemployment rate continues to decline slowly.  Inventories remain lean.  Corporations are making steady profits.   Interest rates are rising slowly but will remain low for some time to come.  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

October 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 to domestic purchasers which excludes both the change in inventories and trade rose by 3.1% in the third quarter after having risen 4.0% in the second quarter.  Over the past year this series has risen at a 3.3% pace.  The deficit for net exports widened by $98.0 billion in the third quarter after having narrowed by $61.4 billion in the second quarter which means that the trade component subtracted 1.7% from GDP growth in the third quarter after having added 1.4% to GDP growth in the second quarter.  In the third quarter exports declined 3.5% while imports surged by 9.1%.

Going forward the stock market should rebound which will boost net worth.  The consumer is confident.  Interest rates are rising slowly but remain low.  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 3.0% rate in 2018 and 2.9% in 2019.

Stephen Slifer

NumberNomics

Charleston, SC


Gross Domestic Purchases Deflator

October 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 1.7% in the third quarter after having rise 2.3% in the second quarter. Over the past year this index has risen 2.4%.

Excluding the volatile food and energy components this index rose 1.7% in the third after after having risen 2.5% 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 3.7% 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 and 2.4% next year.  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 3.0%.

Stephen Slifer

NumberNomics

Charleston, SC