1Q2014 Gross Domestic Product: First (Advance) Estimate

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According to the Bureau of Economic Analysis (BEA), the “advance” estimate of 1Q2014 growth in real U.S. gross domestic product (GDP) collapsed to a seasonally adjusted and annualized rate of 0.1 percent, down by 2.5 percentage points relative to 4Q2013’s growth rate. It was the weakest performance in three years. Only one of the four categories -- personal consumption expenditures (PCE) contributed to 1Q growth; the other categories -- private domestic investment (PDI), net exports (NetX), and government consumption expenditures (GCE) subtracted from growth.

Commercial activity was especially hard hit in this report. Exports were at the head of the retreat, while commercial investments and inventories also weakened significantly. Fixed investments in both equipment and residential construction contracted sharply. Government spending also shrank, especially among the sub-categories of federal defense spending and state and local governmental infrastructure investment.

Consumer spending for services provided the only significant growth, with outlays for non-discretionary healthcare, housing, utilities and financial services (e.g., interest rates) all increasing. Spending on consumer goods was essentially flat.

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For this report the BEA assumed annualized net aggregate inflation of 1.3 percent. By way of comparison, the growth rate of the Bureau of Labor Statistics’ seasonally adjusted CPI-U index was higher (1.8 percent annualized rate); meanwhile, the price index reported by the Billion Prices Project (BPP) was substantially higher at 3.91 percent. Were the BEA’s nominal estimates corrected for inflation using the BPP inflation rate, the 4Q real GDP would have contracted by 2.5 percent.

Inventories contracted sharply, subtracting nearly 0.6 percentage point from the headline growth rate (also down 0.6 percent from 4Q2013). As we have pointed out previously, the first three quarters of 2013 saw substantial inventory growth that boosted the reported annualized growth rate by an average of 1 percent. The $64 question going forward is -- since inventories are typically a cyclical zero-sum game, with excessive growth or contraction over any period subsequently being reversed -- whether a corresponding multi-quarter contraction might occur to “normalize” inventory levels. On the other hand, if the inclement weather truly was as big a drag on economic activity as many think was the case, the growth rate could conceivably bounce back in 2Q.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.