1Q2014 Gross Domestic Product: Third (Final) Estimate

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According to the Bureau of Economic Analysis (BEA), the “final” estimate of 1Q2014 growth in real U.S. gross domestic product (GDP) contracted at the fastest rate in five years -- at a seasonally adjusted and annualized rate of -2.9 percent. That pace of growth is down by 3.0 percentage points relative to the “advance” 1Q estimate, nearly 5.6 percentage points lower relative to 4Q2013 and 7.0 percentage points below 3Q2013. 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.

Revisions to the headline number were concentrated in consumer services (down an additional 1.26 percentage point relative to the “preliminary” estimate) and exports (another -0.42 percent). Nearly all other categories were also revised downward: consumer spending on goods (-0.12 percent), inventories (-0.08 percent) and imports (-0.17 percent). Only governmental spending and fixed investments “avoided the knife” in this report.

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For this report the BEA assumed annualized net aggregate inflation of 1.27 percent. By way of comparison, the growth rate of the Bureau of Labor Statistics’ seasonally adjusted CPI-U index was more than 0.5 percentage point 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, 1Q real GDP would have contracted by 5.6 percent.

The Consumer Metrics Institute highlighted two issues that call into question the popular hypothesis of harsh winter weather causing the 1Q downturn:

• The sharp downward revision to consumer services spending occurred almost exclusively in non-discretionary healthcare expenditures, which is difficult to blame on a harsh winter -- especially since discretionary recreational spending during that same storm-plagued time span was actually revised upward and remained essentially neutral.
• Adherents of that hypothesis need to explain how a harsh winter caused exports to plunge -- resulting in a roughly -2.5 percent change in the headline number relative to the prior quarter. The 1Q weather in the United States was not universally so bad that activity at all ports was impaired; similarly, global weather patterns were not extreme. Export growth had been one of the bright spots of 2013 -- even as the economies of many U.S. trading partners softened.

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.