One Answer To The Curious Case Of Residual Seasonality In U.S. Real GDP

by: Patrick M. Crowley
Summary

Analysis of yoy US GDP growth figures shows that the US economy was not slowing as has been repeatedly mentioned in the media.

Recently, Steve Liesman from CNBC here in the US pointed out that something was wrong with the US real GDP statistics. He noted, and here I attach a picture of my TV screen at home showing his findings, that since 1985, Q1 real GDP growth for the US has been weaker than for other quarters. Of course, this should not be the case, given that statistical seasonal adjustments are supposed to take account of any seasonality in the data and automatically adjust for this. So we clearly have a problem with the US real GDP data, but I believe that Bureau of Economic Analysis (BEA), who produce the data, are going to fix this going back a few years for their revisions in July.

In a way, this is extremely problematic, though, and it stems from the way in which the media in the US reports its GDP figures. In Europe and elsewhere in the world, the standard way to report economic growth is by calculating growth as a % year-over-year change in real GDP, which automatically adjusts for any "residual seasonality" in the statistics. But in the US, GDP figures are reported as "quarter-on-quarter growth expressed as an annualized rate" - which, therefore, does rely much more on an accurate adjustment for seasonality in the GDP figures.

Now you are probably thinking - "Well, who cares?" Well, unfortunately, these figures are very important, not only in terms of setting the tone of the US stock market, but also in terms of policy measures, such as the adjustments of interest rates by the Fed! Many of the market commentators saw the revised GDP figures last week - with the "second estimate" of Q1 GDP showing a contraction of 0.7% in (annualized growth of) real GDP - as a blow to the recovery, and tried to blame this on everything from the port strike on the West coast to the frigid weather in the first quarter. Even commentators said that the economy is too weak for the Fed to move in June to increase interest rates.

But I thought that for this week's blog post, I would take the real GDP growth figures and re-express them in terms of year-over-year growth. So that's exactly what I have done in the figure below. This, I would argue, is a much better way to judge our economic growth, and when you look at it this way, it is really not too shabby, in my view.

Source: BEA.gov; Data calculations: Blog author

Viewed in this light, a 0.7% contraction turns into a 2.7% growth rate, which was an acceleration from Q4 of 2014. Now, if you look at the figure above, you'll see that although consumer spending (C) is drifting in an upwards direction, it is a 7.4% increase in private investment spending (I) that appears to have caused the uptick in the GDP % yoy growth data for Q1. Note, also, that since turning negative in 2010, government spending (G) has also moved into positive territory.

Now what of the international sector. Well here, if you look at the data, the news isn't good, whichever way you report it. If you use the % YOY method that I use here, you will find that exports fell 22.7% YOY and imports increased 6.5% YOY. And in the investment category, if you take out the accumulation of inventories from the figures, investment only increased by 5.2%, which, although still impressive, does suggest that business investment still needs to be boosted by consumer spending, which is still quite hesitant.

But from my own perspective, these figures bolster my view that although the Fed probably won't effect a rate rise in June or July, they should. The economy is growing as strongly as it has been at pretty much any time since 2010 when you measure economic growth in the best way possible, by using the %YOY method! Also, while I know that the strength of the US dollar matters (more on that for another post), the main measure of robust growth in an economy is domestic spending or "absorption". If the US Treasury and Fed have an exchange rate policy of benign neglect for the US dollar, then the movement of the US dollar should not dictate or effect the direction or timing of monetary policy.