Advance Estimates Of U.S. First Quarter Real GDP: The Notable Good Indicators

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by: Procyon Mukherjee


BEA advance estimates of First Quarter Real GDP shows an economic expansion of 0.5% against last quarter’s expansion of 1.4%.

The positive contributions came from personal consumption expenditures (PCE), residential fixed investment, and state and local government spending.

The negative contributions came from non-residential fixed investment, private inventory investment, exports, and federal government spending.

The BEA report gives some mixed data on the advance estimates of U.S. real GDP for the first quarter 2016.

The White House Blog gives the biggest good news that real residential fixed investment rose 14.8 percent at an annual rate in the first quarter, a step up in growth from 2015, with continued potential for strong growth in coming quarters. In fact residential fixed investment has grown by 8% in last six quarters, which is an indication of the solid recovery in the housing sector that far outpaced GDP growth.

The Housing starts have reached 1.1 million units in March'16 and has further room to grow. This would provide the necessary fillip to the domestic consumption growth.

While real private domestic purchases grew by 1.2% in the first quarter, it rose by 2.6% in the last four quarters. The White House commentary however includes a comment that the incomplete seasonal adjustment may have been the reason for the lower first quarter real GDP estimates and points to residual seasonality to be the primary driver of low estimates for the first quarter.

The biggest drag in the first quarter has been non-residential fixed investments which fell 5.9% and the obvious impacts of lower oil related structures and investments cannot be ignored. This brings us to the question whether low oil prices really had a net positive impact on the GDP growth and the issue still remains unsettled.

I go back to the Economic Report of the President released in February'16 to examine whether low oil prices had a net positive impact on the GDP. On page 53 of the report in Chapter 2 it states, "The non-energy commodity price decline of about 25 percent was considerably less than the about 65-percent decline in oil prices, pointing to the role of oil supply in lowering prices. Lower oil prices affect the U.S. economy through numerous channels (CEA 2014).

"On balance, CEA estimates that lower oil prices directly boosted real GDP growth by 0.2 percentage point during 2015, despite the adverse impacts on domestic energy producers and manufacturers that sell to the energy sector. The decline in oil prices noticeably held down price inflation and supported real income growth in 2015."

The report goes on to explain that U.S. economy is less sensitive to oil price movements today than in the past. Moreover, the direct impact of oil price changes on energy consumers and energy producers moves in opposite directions. The overall impact of oil price changes also depends on the sources of those price changes. For example, if oil prices fall due to lower demand in a weakening global economy, this is likely to also coincide with a reduction in U.S. GDP growth, but it would be incorrect to infer that the oil price decline itself hurt U.S. GDP growth. In contrast, if the price of oil falls due to an increase in oil supply, such as from technological advances in oil extraction or improving geopolitical conditions in oil producing countries, lower oil prices would tend to increase U.S. GDP.

The decline in the price of domestically-produced oil sold to U.S. consumers has largely offsetting effects for American oil producers and consumers-although differences in how consumers and producers adjust to lower oil prices may differ enough for aggregate impacts from this channel to appear over shorter horizons. Thus, the primary boost to overall output comes from imported oil.

However, the share of imported oil has declined as domestic production increased and domestic oil use fell, so the overall boost to the U.S. economy from this oil price decline is smaller than would have been the case historically. The report explains how in 2015 U.S. spend $100 Billion less in oil imports and how this savings is spread across all oil-using sectors, especially consumers for whom lower gasoline prices freed up income for other purchases. But we must remember that there is always a phase lag between the fall in prices of oil and the consequent channeling of savings from that in non-oil areas of the economy. This aspect would need further data analysis to complete the quarterly linkage of oil price changes and the corresponding GDP for the consequent quarter.

However the higher savings rate as stipulated in the first quarter BEA report (the personal saving rate, personal saving as a percentage of disposable personal income, was 5.2 percent in the first quarter, compared with 5.0 percent in the fourth) is perfectly in line with this observation.

Oil prices seem to be moving in an upward trajectory from April 2016 together with a range of commodities. If the source of this price change is positive signs in the Chinese economy combined with other emerging economies, like India, doing better, then this price rise should impact U.S. GDP positively.

We cannot miss out the good points on job growth.

Job growth has been consistent and robust over the last eight quarters but it is only to be expected that the future job growth cannot be equal to what it has been in the past; the report makes it clear that even if the unemployment rate falls to 4.5 percent and there is a cyclical rebound in labor force participation, the economy would only need to add 190,000 jobs a month, a slower pace than during the past two years. Thus, a slower pace of job growth in 2016 would be consistent with a normalizing and strong labor market.

The only area where some softness is noticeable, is the continuing decline in Goods Exports, the decline touched 5.4% in the last quarter of 2015 in the BEA report.

We have to wait till May 27th for the second estimate of the First Quarter real GDP.

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