Are You Feeling The Economic Surge?

About: Invesco 1-30 Laddered Treasury Portfolio ETF (PLW), GOVT, FTT, EGF, TAPR, FIBR, RINF
by: Steven Hansen

Third quarter 2016 GDP was revised up to 3.2% - a very good rate of economic growth.

The primary reason for this great rate is the headline methodology which exaggerates small changes.

There is a second problem which creates a lot of noise - change in private inventory.

Wow. According to the headlines the USA economy in the third quarter has surged to 3.2% growth. Hope you are feeling it!

To begin, I hate the quarter-over-quarter methodology which produces the headline GDP. It exaggerates any change in growth by compounding relatively small changes making them huge changes.

The red line in the above chart is the percent change from the same quarter one year ago (year-over-year change). Note how relatively smooth the red line is compared to the compounded jumping around of headline GDP (blue line).

Anyone believing the economy is rolling along at 3.2% is on drugs, and the 1.6% year-over-year growth is a much more representative quantification for the USA economy.

But alas, there is a second problem which creates a lot of noise - change in private inventory. For whatever strange reason GDP recognizes goods warehoused but not yet sold to the final user. Removing the adjustment creates a much smoother and more realistic metric.

I find little logic in the inventory adjustment - as inventory growth can be a precursor to a recession - and speaking as an industrial engineer, inventory change may or may not be an economically positive event.

You will note that despite the great jump in GDP in 3Q2016, the above graph shows the economy is little changed for the last year.

We do see some very moderate growth in our December 2016 economic forecast, but far from suggesting the economy is rumbling along at 3.2%.

This past week, Lakshman Achuthan (head of ECRI) penned a post entitled Sustained 3 To 4% GDP Growth Is A Huge Stretch which is a good companion piece to this post.

My usual weekly wrap is in my instablog.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.