Random Observations on the GDP Announcement

By James Kwak

By now I imagine you know that GDP contracted at an annual rate of 3.8% in Q4, beating economists’ “consensus” prediction of a 5.4% decrease. (Why do people insist on calling an average of forecasts a “consensus?”) A few thoughts:

• You can waste a lot of time looking over GDP statistics. Go to the news release page and download the Excel tables in the right-hand sidebar.
• The “consensus” is that the reason for the positive surprise was an unexpected increase in inventories. (Goods added to inventory count as production, even if they aren’t bought off the shelves.) But . . .
• With any set of numbers that add up to their totals, you can’t really find true causality. All you can do is point out numbers you think are particularly interesting. Another way to look at it is that the numbers were helped out a lot by short-term deflation, particularly due to falling gasoline prices. Personal consumption expenditures (PCE) , the biggest component of GDP by far, fell at an 8.9% annual rate in nominal terms. But the price deflator for PCE fell by so much - an annual rate of 5.5% - that in real terms PCE only fell at a 3.5% annual rate. That fall in prices was almost entirely due to the fall energy prices, which is highly unlikely to be repeated. But do people consciously reduce their spending in nominal or real terms? Nominal, I would think. So, as I “predicted” in December (I always have so many caveats that it’s not really fair to say that I ever predict anything), Q4 was better than expected, but Q1 is likely to be worse than predicted (before today, that is, since everyone is revising their Q1 forecasts down right now), since people will keep ratcheting down spending in nominal terms, but we won’t be bailed out by such a steep fall in prices.
• The savings rate climbed from 1.2% to 2.9% - but it still has a long way to go (it was over 10% in the 1980s).
• Real expenditures on food were down 4% (that’s not an annual rate, that means people spent 4% less on food in Q4 than in Q3). Ouch. I hope that was mainly a shift from restaurants to eating at home.

Back to more useful things.

Comments

[User 265729:]

Excellent observations, but you missed a few of the most important factors:

Inventories

Adjusted prices

Revisions

$billions and $billions in inventories (and growing). The way it's constructed the GDP figures include inventories, so auto companies can produce $100 billion in cars and when nobody buys them, it's still a + for the GDP.

If you adjust for price changes, the GDP was the worst since 1958.

On top of this, expect the "usual" U.S. Government "revision" downward.

The economy is going down the drain faster and faster. Sorry bulls, but you are bull, that's for sure. Gold is +

Jan 30 04:18 PM

[Daniel Herkes:]

"Real expenditures on food were down 4% (that’s not an annual rate, that means people spent 4% less on food in Q4 than in Q3). Ouch. I hope that was mainly a shift from restaurants to eating at home."

Subjectively speaking, there are a lot of dark restaurants in the Northern Illinois suburbs. I'd say home cooked meals are being enjoyed.

Jan 31 07:51 AM

[Jolly_Rancher:]

"Real expenditures on food were down 4% (that’s not an annual rate, that means people spent 4% less on food in Q4 than in Q3). Ouch. I hope that was mainly a shift from restaurants to eating at home."

I actually hope people are going on diets. The fat savings rate is way to high.

Jan 31 10:38 AM

[sleepless_o...:]

Sham,

I don't understand your comment. You said:

"Excellent observations, but you missed a few of the most important factors:

Inventories

Adjusted prices

Revisions"

These are exactly the things the author discussed.

James Kwak,

Thanks for a most concise, meaningful and brief summary of the latest GDP report.

Jan 31 11:09 AM

[ROLEX18K:]

GDP is empty indicator for the grey masses, all crashes started with all mainstream indicators look good, all the recovery's started when indicators looked dead.The market don't watches this junk, we have our own tools and play short term, to us it is not a secret that you - buy and hold investor, will be bankrupt and sell all the remaining shares when DJIA will reach 2000-3000.For us when Dow will rise 10% is between 40-80% frofit, we buy on margin not stocks, futures.Then we sell and stay short.
Friday's GDP was so bad that it will take the market higher in near term but most of you will not make any money on it, you will only watch your stocks and do nothing hoping for DJIA to go back to 14500.
This are dreams, but short covering rally is warranted.

Jan 31 03:12 PM