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Friday, January 30, 2015

4Q2014 Gross Domestic Product: First (Advance) Estimate

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According to the Bureau of Economic Analysis’ (BEA) “advance” estimate, 3Q2014 growth in real U.S. gross domestic product (GDP) was pegged at a seasonally adjusted and annualized rate of 2.6% -- or 2.4 percentage points lower than 3Q’s 5.0%. Analysts had expected a more modest decline to 3.2% (ranging from +2.2 to 3.5%). Personal consumption expenditures (PCE) and private domestic investment (PDI) contributed to 4Q growth, while net exports (NetX), and government consumption expenditures (GCE) subtracted from it.
The 4Q headline was cut nearly in half relative to 3Q by imports (-1.55%), exports (-0.24%), government spending (-1.20%), and fixed investment (-0.84%). Inventory growth (+0.85%) and consumer spending (goods: +0.14%; services: +0.52%) were the only bright spots. As we have frequently pointed out in the past, however, “what inventories give now, they take away in the future” unless the economy is in the midst of sustained and robust growth. Also, a majority of consumer spending on services was concentrated in healthcare -- including insurance premiums, whose connection to the real economy is somewhat tenuous. 
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Consumer Metrics Institute made an interesting observation:
“As mentioned last quarter, plunging energy prices are likely playing havoc with many of the numbers in this report. U.S. at-the-pump gasoline prices fell 33% quarter-to-quarter -- pushing all consumer oriented inflation indexes firmly into negative territory. During 4Q (i.e., from October through December) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was solidly dis-inflationary at a -2.47% (annualized) rate, and the price index reported by the Billion Prices Project (BPP) was significantly more dis-inflationary, dropping [at] an astounding -8.30% annualized rate during the quarter.
“Yet for this report the BEA still assumed a very mildly dis-inflationary annualized deflator of only -0.09%. The disparity between the BEA’s and the BLS’s deflators raises some serious consistency issues. Over reported inflation (or underreported dis-inflation) will result in a more pessimistic growth data; if the BEA’s nominal numbers were corrected for inflation using the line-item appropriate BLS consumer and producer price indexes, the economy would be reported as growing at an implausibly high 7.17% annualized rate. Clearly the BEA’s deflator is troubling, but using the more reasonable deflators from the BLS generates nonsensical growth rates when applied to the BEA’s nominal data; this suggests the BEA's initial nominal data may be more overstated…than reasonable deflators can handle.”
We would observe that the BEA’s GDP deflator typically “travels” in the midrange of the BLS’s CPI, so it will be interesting to see if the CPI turns higher in subsequent quarters.
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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