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1Q2016 GDP Is Not So Bad

The advance estimate of first quarter 2015 Real Gross Domestic Product (NYSEMKT:GDP) is a positive 0.5 %. This is a significant decline from the previous quarter's 1.4 % (but this 1.4% was 0.7 % in the advance estimate last quarter) if one looks at quarter-over-quarter headline growth. However, year-over-year growth unchanged so one could say economic growth was mixed.

The major reasons for the decline in GDP growth were personal consumption for goods, fixed investment, and inventories.

One must consider:

  • This advance estimate released today is based on source data that are incomplete or subject to further revision. Please note that historically advance estimates have turned out to be little more than wild guesses.
  • Headline GDP is calculated by annualizing one quarter's data against the previous quarters data (and the previous quarter was relatively strong in this instance). A better method would be to look at growth compared to the same quarter one year ago. For 1Q2016, the year-over-year growth is 2.0 % - unchanged from 4Q2015's 2.0 % year-over-year growth. So one might say that the rate of GDP growth was unchanged from the previous quarter.
Real GDP Expressed As Year-over-Year Change

Real GDP is inflation adjusted and annualized - and Real GDP per capita remains on a general upward trend. But this month the per capita insignificantly declined.

Real GDP per Capita

The table below compares the 3Q2015 third estimate of GDP (Table 1.1.2) with the advance estimate of 4Q2015 GDP which shows:

  • consumption for goods and services declined.
  • trade balance degraded
  • there was significant inventory change removing 0.33% from GDP
  • there was slower fixed investment growth
  • there was slightly more government spending

The arrows in the table below highlight significant differences between 3Q2015 and 4Q2015 (green is good influence, and red is a negative influence).

[click on graphic below to enlarge]

What the BEA says about this advance estimate:

The increase in real GDP in the first quarter reflected positive contributions from personal consumption expenditures (PCE), residential fixed investment, and state and local government spending that were partly offset by negative contributions from nonresidential fixed investment, private inventory investment, exports, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

My view is that the advance estimate should never be issued - there is not enough data to make the advance estimate anything more than a guess. But more importantly, annualizing GDP growth (as done in the headline numbers) magnifies errors. Year-over-year view smoothes out errors - and shows that for the 1Q2016 that economic growth is flat (and not declining).

Still, there has got to be a better way of looking at the economy other than GDP.

Other Economic News this Week:

The Econintersect Economic Index for April 2016 again insignificantly improved but remains relatively weak. The index continues near one of the lowest values since the end of the Great Recession. This marginal index improvement is due to data being compared against relatively soft data - both month-over-month and year-over-year. Our employment six month forecast is for slightly weaker employment growth for April - and the long term decline in the employment forecast remains in play.

Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) Growth Index is now in positive territory and forecasting a marginally strengthening economy six months from now.

Current ECRI WLI Growth Index

The market expectations for weekly initial unemployment claims (from Bloomberg) were 240,000 to 264,000 (consensus 260,000), and the Department of Labor reported 257,000 new claims. The more important (because of the volatility in the weekly reported claims and seasonality errors in adjusting the data) 4 week moving average moved from 260,750 (reported last week as 260,500) to 256,000. The rolling averages generally have been equal to or under 300,000 since August 2014.

Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line), 2015 (violet line)

Bankruptcies this Week: Goodrich Petroleum, SunEdison (fka MEMC Electronic Materials), Sao Paulo, Brazil-based Lupatech (f/k/a Valmicro Industria e Comercio de Valvulas - Chapter 15)

Please visit our landing page for a summary of all of our analysis this week.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.