Month: May 2014

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report

The BEA announced in the advance estimate last month that real GDP increased at a s.a.a.r. of 0.1% for 2014 Q1…and the second estimate released this morning revised that down to -1.0%.   Is this just a pregnant pause or are we in danger of sinking into another contraction?  A close look at the details suggest that more likely than not it is just a pause.  Much of the decline was due to a large downward revision to estimates of inventory accumulation in the first quarter.  Inventory accumulation has been a source of strength for the past couple of quarters and the decline of inventories in the first quarter is the counterpart to that.   The revisions to most of the other components of GDP were relatively minor.

Consumption was essentially unchanged compared to the first estimate.  Investment in equipment showed a smaller decline than in the first report and investment in  intellectual property increased significantly in this revision.  Investment in non-residential structures was revised downward significantly .

The interesting question is what does all of this mean for the progress of the recovery?  It is a dismal set of revisions compared to what was already a dismal estimate of first quarter progress.  Is the economy going to be in a prolonged pause or pull itself out?  The only positive indication from this revision is that with inventories reduced firms will not have a big hangover of inventories that could hold back production in the second quarter. Many forecasters at the FED and elsewhere are looking for growth rates to climb back toward 3% in the coming quarters following two quarters of dismal growth. The second quarter GDP estimates (not due until July 30th) are going to be the first indicator we have of whether this is just wishful thinking or not.

On a more positive note, initial claims fell 27,000 to 300,000.

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report

The BEA announced in the advance estimate that real GDP increased at a s.a.a.r. of 0.1% for 2014 Q1. In addition, the final estimate for Q4 real GDP showed a 2.6% growth rate, unrevised from the second estimate. The Q1 growth rate was the lowest since 2012 Q4.

Personal consumption expenditures increased at a 3.0% clip, with the services component at 4.4%, the highest rate since 2000. The big negatives came from fixed investment (mainly equipment and residential), inventories, and net exports.

Such a dismal report certainly makes the decision of the FOMC more difficult, but they stayed the course and maintained the taper, as can be read in their release here. Is the dismal report from “weather related” disturbances? Or, is it a signal of an economy slowing down? As always in an FOMC statement the words are carefully chosen. For example,

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases.

It is not clear what “…sufficient underlying strength in the broader economy…” means. The statement does mention “…adverse weather conditions…” but it seems like they are putting a lot of emphasis on the bad weather. As shown above, there were large declines in investment, both residential and non-residential. Moreover, measures of the labor market don’t seem that consistent with the statement. Here is a picture of the employment to population ratio from FRED; and here is one comparing the path after recessions:

Initial jobless claims rose 14k to 344k (median 320k) for the week-ended April 26, more than reversing the recent drop. Continuing claims rose 97k to 2,772k for the week-ended April 19. The four-week average rose to 320k to mark the second consecutive weekly rise, though we’ve remained below 340k since the second week of January.

The employment report comes out tomorrow…