4Q2016 Gross Domestic Product: Second Estimate

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In its second estimate of 4Q2016 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) made some zero-sum revisions that left the growth rate of the U.S. economy essentially unchanged at a seasonally adjusted and annualized rate (SAAR) of +1.85% (below consensus expectations of 2.1%), down 0.02 percentage point from the previous 4Q estimate and also down by nearly half (-1.68 percentage points) from 3Q2016's +3.53%.

Three of the four groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), and government consumption expenditures (GCE) -- contributed to 4Q growth; net exports (NetX) detracted from it.

Notable underlying revisions include: an upward revision in consumer spending, both in services and goods; a downward revision to business investment (mostly in intellectual property products and equipment); and a downward revision to state and local government spending (primarily in structures).

The reason for the headline miss was a decline in fixed investment which slid from 0.67% to 0.51% as capital expenditures appear to have been weaker than initially thought, coupled with a negative revision to both private inventories (down from +1.00% to +0.94%) and the contribution from Government, which subtracted another 0.15% point.

The net exports category was unchanged, and was the biggest detractor from 4Q growth (-1.7%) as the 3Q surge of exports to South America dissipated. 

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“This revision was material only because the source components of the ‘not great, but on the other hand not really bad’ headline were shifted in a zero-sum way from commercial investments and governmental expenditures to consumers,” wrote Consumer Metric Institute’s Rick Davis, while noting the following:

-- In 3Q (covering the pre-election economy), the BEA reported that the U.S. GDP was growing at a 3.53% annualized rate. Now that growth has been essentially halved.

-- The BEA's own “bottom line” final sales growth rate dropped over 2% and was below 1% (+0.91%) -- once growing inventories were factored out.

-- The inflation neutralizing GDP deflator used (+2.03%) was materially below the inflation rate recorded by the BEA's sister agency, the Bureau of Labor Statistics (+3.05%). Using the BLS data to deflate the numbers also results in a sub-1% growth rate (+0.87%).

“As we mentioned last month,” Davis concluded, “4Q growth was just ‘kind of, sort of’ OK. Meanwhile, the BEA’s ‘bottom line’ sub-1% growth rate is somewhat less than OK. It will be interesting to see just how this headline holds up in the upcoming revisions.”

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.