1Q2020 Gross Domestic Product: Second Estimate

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In its second estimate of 1Q2020 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) revised the growth rate of the U.S. economy to a seasonally adjusted and annualized rate (SAAR) of -5.05% (-3.8% expected), down 0.26 percentage point (PP) from the “advance” estimate (“1Qv1”) and -7.17PP from 4Q2019.

As with 1Qv1, two of the four GDP component groupings -- net exports (NetX) and government consumption expenditures (GCE) -- made positive contributions to the headline; however, personal consumption expenditures (PCE) and private domestic investment (PDI) were overwhelmingly negative.

This report contained few material changes. As for details:

·      PCE. Revisions to consumer spending were either somewhat less negative (services and durable goods) or marginally more positive (nondurable goods). The net effect was a +0.57PP revision from the previous 1Q estimate, but -5.93PP from 4Q2019.

·      PDI. Inventories were revised down by 0.90PP from 1Qv1 (-0.45PP from 4Q2019), while fixed investment was revised slightly upward (+0.02PP). Investment in equipment and residential structures weakened further in this report, however.

·      NetX. The QoQ drop in imports (imports subtract from GDP) remained greater than that in exports, leading to a positive contribution to the headline.

·      GCE. Federal defense and state/local spending were each revised fractionally higher.

The BEA's real final sales of domestic product was revised modestly upward (+0.64PP, to -3.62%), which is 6.72PP below the 4Q estimate. 

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Consumer Metric Institute’s Rick Davis summarized the key points of this report as follows:

-- As expected, this report's headline number is lower than the previous report. But the cause of the downward revision to the headline was inventories, not consumers.

-- Consumer spending was reported to be contracting at a 4.69% annualized rate. But this was actually up 0.57PP from the previous report. All of that reported contraction is in spending for consumer services, and spending on goods is now reported to have continued modest growth.

The BEA's previous report was a ball-park “guesstimate” placeholder under circumstances where their measuring methodologies are woefully inadequate to deal with an economy in drastic transition -- and in a political environment where they wanted to be out in front with the bad news. As a practical matter, they won't even have a good handle on the true state of the economy when initially reporting a much worse second quarter and doing their annual July historical revisions.

If we now understand the value of national and global pandemic response planning exercises, we might also understand the need for more timely reporting from the BEA (e.g., month-by-month series instead of quarterly series, based on something far closer to real-time transaction data). Otherwise you will end up with Congress tossing around multi-trillion dollar relief packages with no quantitative idea about how much of what kind of aid is truly needed.

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.