Monday, 24 of September of 2018

Economics. Explained.  

Category » GDP

GDP

August 29, 2018

The first revision to second quarter GDP came in at 4.2% compared to an initial reading of 4.1% and 2.2% growth rate in the first quarter.  For 2017 as a whole GDP rose 2.5%.  We expect GDP growth of 3.1% this year.  .

Final sales, which is GDP excluding the change in business inventories surged 5.3% in the second quarter having having risen rose 1.9% in the first quarter.   Over the past year final sales have risen 3.0%.  In the second quarter inventories  actually declined  $26.9 billion after increasing $30.3 billion in the first quarter.  Thus, inventories  subtracted 1.1% from GDP growth in the second quarter.  Inventories are expected to rise by roughly $20 billion per quarter in the quarters ahead.

Final sales to domestic purchasers excludes both the change in inventories and trade rose by 3.9% in the second quarter after having risen 1.9% in the first quarter.  Over the past year this series has risen at a 2.9% pace.  The deficit for net exports narrowed by $58.7 billion in the second quarter which means that the trade component added 1.4% to GDP growth in the second quarter as exports surged by 9.1% while imports declined by 0.4%.

Consumption spending rose 3.8% in the second quarter after having risen 0.5% in the first 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 climbed by 8.5% in the second quarter after having jumped by 11.5% in the first quarter.  For 2017 nonresidential investment climbed 6.3%.  We expect nonresidential investment to  increase 7.7% 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 1.6% in the second quarter after having fallen 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  increase 0.2% in 2018.

The foreign sector as measured by the deficit for real net exports narrowed by $58.7 billion in the second quarter to -$843.7 billion after having widened by $3.2 billion in the first quarter.  Exports rose 9.1% in the first quarter while imports declined 0.4%.  We expect the deficit for net exports to add 0.4% to  GDP growth in 2018.

Federal government spending rose 3.7% in the second quarter after having risen 2.6% in the first quarter.  Federal government spending is expected to rise 3.3% in 2018 as President Trump increases defense spending while non-defense spending is relatively unchanged.

Following GDP growth of  2.5% in 2017 we expect growth of  3.1% in 2018 given the individual and corporate tax cuts and some repatriation of earnings from overseas.

Stephen Slifer

NumberNomics

Charleston, SC


Final Sales

uly 30, 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 surged 5.1% in the second quarter after having risen rose 1.9% in the first quarter.   Over the past year final sales have risen 3.0%.  In the second quarter nonfarm inventories actually declined  $27.9 billion after having risen $30.3 billion in first quarter.  Thus, inventories  subtracted 1.0% from GDP growth in the second quarter.  Inventories are expected to rise by roughly $20 billion per quarter in the quarters ahead.

We believe that GDP growth will quicken from 2.5% in 2017 to 3.1% this year.  Consumers are confident.  The stock market should 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

July 30, 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 3.9% in the second quarter after having risen 1.9% in the first quarter.  Over the past year this series has risen at a 2.9% pace.  The deficit for net exports narrowed by $52.5 billion in the second quarter which means that the trade component added 1.2% to GDP growth in the second quarter as exports surged by 9.3% while imports climbed by 0.5%.

Going forward the positive factors are that the stock market should 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 3.1% rate in 2018 after having risen 2.5% last year.

Stephen Slifer

NumberNomics

Charleston, SC


Gross Domestic Purchases Deflator

July 30, 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 2.4% in the second quarter versus a 2.5% increase in the first quarter. Over the past year this index has risen 2.3%.

Excluding the volatile food and energy components this index rose 2.4% in both the first quarter and second quarters.

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