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Thursday, August 28, 2014

2Q2014 Gross Domestic Product: Second (Preliminary) Estimate

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According to the Bureau of Economic Analysis (BEA), the “preliminary” estimate of 2Q2014 growth in real U.S. gross domestic product (GDP) expanded at a seasonally adjusted and annualized rate of 4.2 percent. The revised 2Q rate of expansion is 0.2 percentage point faster than the initial (“advance”) estimate, and 6.3 percentage points above 1Q’s 2.1 percent contraction. This is the largest positive quarter-to-quarter improvement in GDP growth in roughly 14 years. Three of the four categories -- personal consumption expenditures (PCE), private domestic investment (PDI), and government consumption expenditures (GCE) -- contributed to 2Q growth; net exports (NetX) subtracted from growth.
The largest positive revisions to the headline number came from:
·     Commercial fixed investments (+0.34 percentage point relative to the “advance” 2Q estimate),
·     Imports (+0.11 percentage point),
·     Exports (+0.08 percentage point) and
·     Consumer expenditures for services (+0.09 percentage point).
The increase in consumer services spending was mostly offset by reduced spending for consumer goods (-0.08 percentage point); the improvement in fixed investment was partially offset by reduced inventory accumulation (-0.27 percentage point), although inventories remained the single largest contributor to the headline number.
Growth in real final sales of domestic product, the BEA’s “bottom line” indicator of economic health (which excludes the ever-volatile inventories) improved by about a half percentage point, to +2.79 percent.
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For this report the BEA assumed annualized net aggregate inflation of 2.2 percent. By way of comparison, the growth rate of the Bureau of Labor Statistics’ concurrent seasonally adjusted CPI-U index was 3.5 percent (annualized); meanwhile, the price index reported by the Billion Prices Project (BPP) was 2.7 percent. Were the BEA’s nominal estimates corrected for inflation using the CPI-U, 2Q real GDP would have grown by 2.9 percent; if using the BPP inflation rate, growth would have been 3.7 percent.
Although we do not want to be guilty of looking for a cloud in the “silver lining,” we continue to question whether the U.S. economy is truly chugging along as strongly as the GDP estimate might suggest. Points to ponder along that vein include:
·     Inventories tend to create a zero-sum game over the long haul. The second quarter’s inventory growth was essentially the “flip side” of 1Q’s contraction.
·     The surge in goods exports (from subtracting 1.18 percentage points from the 1Q headline number to adding 1.22 percentage points in 2Q) seems strange in the context of apparent softening economic growth among the United States’ major trading partners.
·     Our own perception is the economy did not feel like it was growing 6.3 percentage points faster in 2Q than 1Q. 
One must decide whether that phenomenal turnaround in just 90 days is genuine, or “a sign of seriously noisy numbers momentarily pointing towards implausible and/or unsustainable growth.”
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.

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