1Q2020 Gross Domestic Product: First (“Advance”) Estimate

Click image for larger version

The Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 1Q2020 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of -4.79% (-3.8% expected), down 6.91 percentage points (PP) from 4Q2019’s +2.12%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 1Q2020 was 0.32% higher than in 1Q2019; that growth rate was dramatically slower (-2.01PP) than 4Q2019’s +2.33% relative to 4Q2018.

Two groupings of GDP components -- personal consumption expenditures (PCE) and private domestic investment (PDI) were the drivers behind the contraction, whereas net exports (NetX) and government consumption expenditures (GCE) made minor positive contributions.

As for details (note that all dollar amounts are nominal) --

PCI:

·     Goods. Contributions to the headline from durable goods were negative across the board (-1.21%; -1.41PP QoQ), thanks mainly to a $53 billion drop in motor vehicles and parts. Nondurable goods added to the headline (+0.94%; +1.02PP QoQ) as a result of a $68.3 billion surge in grocery shopping and $38.1 billion in other nondurable goods purchases.

·     Services. Spending on services was a major detraction (-4.99%; -6.11PP QoQ) -- especially health care (-$109.9 billion), and food services and accommodations (-$81.5 billion).

PDI:

·     Fixed investment. Contributions from nonresidential fixed investment fell (-1.17%; -0.84PP QoQ) as structures (-$13.0 billion) and transportation equipment (-$24.3 billion) declined. By contrast, the contribution from residential investment accelerated (+0.74%; +0.50PP QoQ), consistent with a $44.3 billion increase.

·     Inventories. The contribution from inventories was less negative (-0.53%; +0.45PP QoQ) despite a $32.2 billion contraction in non-farm inventories.

NetX: Because the value of imports fell (-$125.0 billion) more than exports (-$75.0 billion), net exports added to the headline (+1.30%; -0.21PP QoQ).

GCE: Increased expenditures (+$36.8 billion) at all levels of government accounted for a modest addition to the headline (+0.13%; -0.31PP QoQ).

Annualized growth in the BLS’s real final sales of domestic product, which excludes the value of inventories) was -4.26% (-7.36PP QoQ). 

Click image for larger version

Commentary from Consumer Metric Institute’s Rick Davis:

-- This is only the beginning, and this number is very likely to be revised lower in the next two reports and again in July. We have previously criticized the BEA for being late in recognizing dramatic turns in the economy, and we would be remiss if we didn't recognize that they are much more timely this time around.

-- Timing is everything. Depending on just how bad the second quarter is, the third quarter is likely to show quarter-over-quarter growth -- even as year-over-year data remains abysmal. That quarter-over-quarter growth will be conveniently announced just prior to the November Presidential Election. The political cynics among us might suggest that the BEA's new-found timeliness in fully reporting this contraction stems from an interest in advancing the inevitable bad news precisely in order to set the stage for a 3Q2020 quarter-over-quarter turnaround.

-- Moving forward, the contraction in consumer services spending, the security of paychecks and the rise in the household savings rate will not be evenly experienced among all demographics -- just like the pandemic itself. Individual household economics will continue to divide those advocating for maximized public health and those seeking a rapid return to economic normality.

“The latter point may be the most important,” Davis concluded. “We may be observing yet another divide opening in an already divided society.

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.