The View From Friday's GDP Report

Includes: AGG, DIA, IVV, SPY
by: William Trent, CFA

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.4 percent in the second quarter of 2007, according to advance estimates released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.6 percent.

As I have discussed in the past, the estimates get revised several times, including up to several years later. According to the BEA:

The estimates released today reflect the annual revision to the national income and product accounts (NIPAs), beginning with the estimates for the first quarter of 2004. Annual revisions, which are usually released in July, incorporate source data that are more complete, more detailed, and otherwise more reliable than those previously available. This release includes the revised quarterly estimates of GDP, corporate profits, and personal income and provides an overview of the effects of the revision.

In other words, it is time to go back and revisit everything that has been written about GDP over the past three years because it was based on incomplete information. Or at least base new observations on the newly updated tables.

Friday’s report has been billed as strong. Said Reuters:

Economic growth rebounded during the second quarter to its strongest pace since the beginning of last year on a surge in business investment, more government spending and a better trade performance.

But keep in mind, the headline report is the earliest (and least reliable) data, is adjusted for seasonal impacts and annualized, all of which require assumptions from the same officials who will spend the next three years revising them. As usual, I prefer to look at the data without seasonal adjustments and compare it to the previous year to eliminate at least some of these assumptions. And on that basis, while the quarter looked a bit stronger than last, it is far from looking like the strongest in anything more than one quarter.

click to enlarge

Looking at how the GDP figures were generated is also interesting. Personal consumption finally slowed, as many have been predicting. The traditional story is that it would be replaced by business investment (private direct investment in the chart). While PDI was at least positive this time, it didn’t make up for even half the decline in consumption. Instead, government spending accounted for 0.82% of the reported rise in GDP. The change in net exports contributed more than a percent - due in part to increased exports but also to decreased imports (which is also reflected in personal consumption).

GDP Contributors

As expected, residential investment continues to be weak.


However, it is acting as less of a drag on GDP, at least directly.

residential contribution

All in all, the report was not as strong as the headlines suggest. There were some improvements from last quarter, but it looks far too early to be calling a bottom.