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Friday, February 26, 2016

4Q2015 Gross Domestic Product: Second (Preliminary) Estimate

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In its second (“preliminary”) estimate of 4Q2015 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) adjusted the rate at which the U.S. economy grew -- from a +0.69% seasonally adjusted and annualized rate (SAAR) posted in January, to +1.00%. That +0.31 percentage point revision was a surprise, as expectations were for a 0.3 percentage point decrease. Despite the upward revision, 4Q’s GDP growth rate was still only half that of 3Q. Moreover, 4Q2015’s year-over-year growth rate was +1.9%, slower than 3Q’s +2.1%.
Groupings of GDP components show that personal consumption expenditures (PCE) contributed to 4Q growth whereas private domestic investment (PDI) and net exports (NetX) detracted from it. Government consumption expenditures (GCE) was essentially neutral.
As MarketWatch.com put it, the upward GDP revision was the “worst kind,” as all of the net improvement could be attributed to one line item: inventories (+0.31% -- equal to change in the headline aggregate); changes in the other line items netted out to zero. Inventories grew in 3Q by $85.5 billion. Instead of the 4Q inventory increase of $68.6 billion reported in January, the BEA revised the increase by nearly one-third to $90.6 billion. So, rather than a 3Q-4Q rate of change of -$16.9 billion ($68.6 - $85.5 = -$16.9), inventories instead expanded by $5.1 billion ($90.6 - $85.5 = $5.1).
The contribution of consumer spending was revised downward (goods: -0.11%, to less than half of 3Q’s contribution; services: +0.03% from January’s report). Fixed investment growth inched down (-0.01%) to +0.02%. Government spending edged into mild contraction, removing -0.01% from the headline. Exports were even weaker than initially thought, however, clipping 0.34% from the revised headline growth rate.
In fact, other than inventories, the only “good news” (given the way the BEA computes GDP growth) was that lower spending on imports contributed +0.09% to the headline growth number. Although most of this lower spending came from falling commodity prices, some also came from weaker demand. 
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Despite this report being mostly statistical noise, some overarching patterns are apparent:
* The reported headline growth came largely from inventories and imports, both of which can be strongly influenced by rapidly changing commodity prices. Changes in the physical levels of trade and inventories are much smaller than the dollar-value changes would suggest.
* Consumer demand for goods was revised downward, as was fixed investment -- by states, local governments and commercial investors. Any lingering growth in the consumer, commercial and governmental demand for real/physical goods is softening.
* Exports fell even further into contraction.
* Any residual growth in consumer spending for services is not discretionary -- it is primarily a consequence of inexorably rising health care costs; in fact, over 22% of the YoY increase in GDP is attributable to spending on health care.
“Even at face value, a 1% growth rate is fundamentally anemic,” concluded the analysts at Consumer Metrics. “And looking deeper into the numbers, most of that 1% comes from the economic fog created by highly volatile commodity prices. So, despite an upward blip in the headline number, we see no particular reason to be cheering this report.”
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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