Tuesday, February 17, 2015

US GDP Looking Weaker (excerpt)

On second thought, economists seem to be having second thoughts about what happened to real GDP during Q4-2014 and what may be happening during the current quarter. We are all lowering our expectations. The official preliminary number for Q4 was 2.6% (saar). That was disappointing compared to the previous quarter’s 5.0%. Moreover, a big jump in inventories boosted the Q4 growth rate, with final sales up only 1.8%.

Economists concluded that a slower pace of inventory investment would weigh on the current quarter’s GDP growth rate. Last week’s release of December business inventories suggests that inventory investment was much weaker during Q4. So this component should be less of a drag on GDP during Q1. However, January retail sales were surprisingly weak following December’s disappointing numbers. Let’s have a closer look:

(1) Retail sales fell 0.8% during January, following a 0.9% drop during December. However, falling prices, especially for gasoline, exaggerated the weakness. Inflation-adjusted retail sales rose 8.4% (saar) during the three months through January. That makes more sense to us given the strength in payrolls and the record high in inflation-adjusted wages.

(2) Inventories rose just 0.1% during December following a 0.2% gain during November. The official preliminary estimate of real GDP includes a $113 billion increase in inventories (saar), the most since Q3-2010. I estimate that this number could be revised downwards to unchanged from the previous quarter, which would lower the Q4 real GDP growth rate to only 1.8%. On the other hand, the inventory investment component is now much less likely to be a significant drag on Q1’s growth rate.

(3) GDP rose 2.3% last year, on a Q4/Q4 basis, assuming that Q4 is revised downward as noted above. That’s okay, but not awe inspiring. I expected more awe this year, but it is starting out more like “aw, shucks.” I am lowering my forecast for this year from 3.0% to 2.8%, and for Q1 from 3.2% to 2.7%.

The problem may be that there has been a secular slowdown in the growth rate of the labor force in recent years, which has lowered the trend growth of real GDP. On the other hand, payroll employment growth rose to 2.3% y/y during January, the best since June 2000. In other words, there is still a puzzling discrepancy between the improvement in the labor market and the lack thereof in GDP.

Today's Morning Briefing: Reenergized. (1) The more things change, the faster they change. (2) Three scenarios. (3) Six-year bull going on seven. (4) Another panic followed by another relief rally to record high. (5) Stocks aren’t cheap. (6) More fairy dust from Yellen next week? (7) Oil’s bungee jump. (8) Overweight Energy and market-weight Transportation. (9) Time out for bonds and currencies. (10) Retail sales not so bad. (11) Downward revision for GDP. (12) Perceptions change on global economy. (13) China’s debt addiction. (14) Focus on market-weight-rated S&P 500 Retailers. (15) “Timbuktu” (+ + +). (More for subscribers.)

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