GDP Data Release (and primer)
"The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists."
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Today's Q1 GDP release will be interesting, to say the least.
After the Q4 GDP revisions (which we forewarned about), I've gotten many emails asking how and what goes into GDP data. As you requested, here is a grossly oversimplified review on GDP data:
GDP is the sum total of the economic activity in the nation. It is comprised of Personal consumption, plus Gross domestic investment, plus Government consumption and investment, plus Net exports.
Putting that into a simple formula would look like this:
GDP = consumption + investment + Government spending* + (Exports − Imports)
There are 3 GDP releases: Advance, Preliminary, and Final. We get one at the end of each month. Because some of the data takes a while to assemble, the first two releases are often revised. Recall the initial 2006 Q4 release was 3.5%, which turned out to be off by almost 30% (final was 2.5%). The range of revisions is typically between 50 and 100 basis points. There's no grand conspiracy here, it merely takes a while to assemble various data, like capital spending, imports, exports, etc.
Once we have a GDP number, we can look at it two ways: Nominal and Real. Nominal GDP is the dollar value of output (see formula above), regardless of inflation. Real GDP takes into account how much of the increase in dollar output is attributable to price increases, versus output increases.
Okay, with that out of the way, lets look at how GDP and its components might shake out this morning. The WSJ's Justin Lahart notes:
"The Commerce Department reports first-quarter gross domestic product today and economists don't expect good news. They estimate the economy grew at a 1.8% annual rate, slower than the already tepid fourth-quarter rate of 2.5%. That would make it the fourth quarter in a row that GDP has grown at less than 3%. The last time that happened was during the jobless recovery of 2002.
The biggest drag on the economy continues to be housing, which subtracted more than a full percentage point from GDP growth in the previous two quarters. Business spending was lackluster, leaving it to American consumers to generate demand. That's worrisome, says Northern Trust economist Paul Kasriel, because consumer spending has weakened. Hardly noticed amid the stock-market rally, Target said last week that it expects its sales in April will be much lower than anticipated."
The big variable is if, and how much, consumer spending slowed. We know that Residential construction slowed significantly, equipment and software CapEx was flattish. Another wild card is inventory build, which has shown an ability to surprise the past few Qs. And given the weak and falling dollar, and the profit strength of multi-national companies, perhaps US exports improved somewhat (more exports + less imports = higher GDP).
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Now for the market question: Do traders want to see higher GDP, implying greater profitability or weaker GDP, greasing the skids for a Fed Rate cut sooner rather than later? I have nary a clue as to which is more market friendly. We'll find out in half an hour . . .
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* Note that some forms of government payments -- social security, medicaid, etc, are not included in GDP's formula.
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Sources:
Heady Stocks Leave Economy On the Ground
JUSTIN LAHART
WSJ, April 27, 2007; Page C1
http://online.wsj.com/article/SB117763391886584237.html
News Release: Gross Domestic Product and Corporate Profits
BEA
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
Friday, April 27, 2007 | 07:55 AM | Permalink
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1.3% with 4% deflator-How much of that can be said to be spending on our current wars?
Posted by: Neal | Apr 27, 2007 8:49:24 AM
I think 1.3% is already adjusted for inflation, but I could be wrong.
Posted by: theroxylandr | Apr 27, 2007 8:52:18 AM
What? 1.3% growth? And I've been reading here for all these months about how terrible the economy is, about how the crash of the housing market has left us in a recession - nay, a 1930s style depression - and you mean to say there's actually growth?
I mean, I just read yesterday that there are no cars being sold, no racehorses being auctioned off, no boats being bought, condo associations going broke everywhere, furniture not being bought.....
All this bad news and you tell me there's growth? The government is lying. LYING, I TELL YOU! There are Hoovervilles everywhere, and 25% unemployment, and the END IS NIGH!
Posted by: Nova Law | Apr 27, 2007 9:04:17 AM
Great stuff Barry. Thanks
Especially that link to Q4 revisions.
I'd love to hear more about that personal consumption deflator.
Posted by: tjofpa | Apr 27, 2007 9:10:15 AM
Counselor! -- Approach the Bench
sotto voce, to the lawyers
Young man, one more outburst like that and I will have you flogged.
You well know that no one suggested a depression, nor did anyone in this court say we are currently in a recession.
To reiterate what you missed while doodling on your yellow pads: DECELERATION. Growth is slowing. It is not yet negative. Yes, we are expanding, but it is at a much slower rate than previously. And that rate is on the downtrend. Think movie, not snapshot. Not zero car and boat sales -- slowing sales.
Stick to the data, and stop making ridiculous outbursts. The next time you make a factually false statement like that, I will hold you in contempt, and inform the bar association of your behavior.
Now go back to your table, and behave like an adult.
~~~~
The jurors are instructed to disregard the latest outburst of defense counsel. Do not hold the inappropriate and unprofessional outburst of Counsel against his client.
15 minute recess
Posted by: Barry Ritholtz | Apr 27, 2007 9:12:40 AM
Nova Law, LESS growth than expected, and borderline recession to boot.
The recession might start as early as this quarter, given that some of the growth in the 1stQ was borrowed from the 2ndQ (early Easter).
As for "25% unemployment". Did you know that entering recession in 1929, the US had 3.9% unemployment, and just 3 years later that was up to 25%? Do you know why? A debt-fueled chain reaction is the answer.
Posted by: Incognitus | Apr 27, 2007 9:15:07 AM
Q1 GDP rose at an annualized pace of 1.3%, the slowest rate of gain since Q1 '03. The Price Deflator was a full percentage point higher than expected rising 4%.
Personal Spending did rise .3% more than expected, rising 3.8%, vs the consensus of 3.5%. BUT headline PCE price deflator rose 3.4% so Real Spending was up just .4% as inflation has driven the sales #s.
Residential construction fell 17% and real final sales which takes out the impact of inventories, rose just 1.6% down from 3.7% in Q4.
Govt spending slowed. Commercial construction rose 2.2% and spending on equipment and software rose 1.9% after being down 2 out of the 3 prior quarters.
The PCE core deflator rose 2.2% up from 1.8% in Q4. The overall inflation Price Deflator rose 4%, the most since Q1 1991.
Bottom line, the world's biggest economy continues to slow and while overseas economy's will be much better off than in the past, they are not immune.
Posted by: Peter | Apr 27, 2007 9:16:40 AM
Touche!
Barry, how did you know I've made my bones tweaking judges? One thing I learned early in my career is that the jury, not the judge, makes the decisions in a trial. And the jury wants high drama, entertainment, and excitement, while the judge would like things nice and quiet, for his two hobbies are watching paint dry and watching grass grow.
Come to think of it, judges probably have a lot in common with macroeconomists. ;-)
Posted by: Nova Law | Apr 27, 2007 9:17:53 AM
One technical aspect of the data makes it easier to understand why revision are so large.
When the first report comes out we have three months data on consumption, investment and government but only two months data on trade and inventories. In the gdp release the average of the three months data for consumption, fixed investment and government is used. but for trade and inventories the gdp report uses the change from the final month of the quarter to the final month of the quarter. So for the more stable components of gdp we use a smoothed average of the three month data. but for the most volatile data -- trade and inventories -- gdp uses an unsmoothed change from point to point. Moreover, this is the very data we do not have the third month data on when the first estimate of gdp is released.
Posted by: spencer | Apr 27, 2007 9:25:04 AM
If they revise these numbers downwards, is it possible that growth for Q1 could actually be *gasp* negative ???
Well slower growth only means a rate cut . Time to run the Dow up another 500-600 points. This disconnect between the economy and the stock market is getting serious.It can only end badly.
Posted by: IM | Apr 27, 2007 9:28:10 AM
"One thing I learned early in my career is that the jury, not the judge, makes the decisions in a trial. And the jury wants high drama, entertainment, and excitement, while the judge would like things nice and quiet, for his two hobbies are watching paint dry and watching grass grow."
Really? When your "high drama and entertainment" approach runs afoul of basic trail conduct, are you summoned to approach the JURY where you practice? Until he gives them the case for resolution, the judge has total control and makes all the decisions, at least where I come from. And even AFTER they render a decision, the judge can set it aside on various grounds. More self-glorious hyperbolefrom "Nova Law".
Posted by: MarkM | Apr 27, 2007 9:32:41 AM
NO GO law... too many pumpkin spice lattes this morning?
Posted by: Sponge Todd Square Pants | Apr 27, 2007 9:42:57 AM
Well, MarkM, I've never had a jury trial verdict overturned either by the judge or an appellate court, nor have I ever been sanctioned. I've lost my share of cases but won many more than I lost.
Best of all, I made a lot of my smug opponents unhappy, however, and as you can see I enjoy it very much.
Posted by: Nova Law | Apr 27, 2007 9:43:00 AM
1.3%?
Ouch.
Posted by: wally | Apr 27, 2007 9:44:51 AM
Barry,
LMAO - literally.
No offense, Nova, but that was hilarious.
Posted by: John | Apr 27, 2007 9:48:12 AM
I really don't understand this. If the economy is slowing, why is the stock market not correcting downward to reflect this? Is the stock market performance all about international growth? Is international growth good enough to keep it going?
Posted by: Ryan | Apr 27, 2007 9:49:42 AM
I really don't understand this. If the economy is slowing, why is the stock market not correcting downward to reflect this? Is the stock market performance all about international growth? Is international growth good enough to keep it going?
Posted by: Ryan | Apr 27, 2007 9:51:18 AM
N/L-
So you say.
Not that financial blogs should be the forum for discussions of basic trial mechanics, but when running off about legal matters do try to stick somewhere close to the facts. I understand that it gets in the way of a good story sometimes.
Posted by: MarkM | Apr 27, 2007 9:54:01 AM
Nova--
unhappy? time for an ego check. you're a mosquito. annoying, ultimately inconsequential.
and a remarkably immature mosquito at that.
go hit the motley fool boards. people here are generally a tad more sophisticated and experienced than you. you might be appreciated there for your rapier-like wit and informed commentary.
ciao, bambino.
Posted by: dark1p | Apr 27, 2007 9:54:09 AM
When your "high drama and entertainment" approach runs afoul of basic trail conduct, are you summoned to approach the JURY where you practice? Until he gives them the case for resolution, the judge has total control and makes all the decisions, at least where I come from. And even AFTER they render a decision, the judge can set it aside on various grounds.
---
Apparently you have never been in a courtroom. Granted, it is not like TV, but I've seen my fair share of "film ready" attorneys play to the jury. And in front of a jury, it is not often that a judge throws his weight around, for fear of admonishment by the appellate court on appeal.
---
An economic question: what is the accepted definition of a "soft landing"?
Posted by: LAWMAN | Apr 27, 2007 9:55:11 AM
Nova,
Sometimes big ships go down slowly... but keep playing happy music for us all the way down.
Posted by: wally | Apr 27, 2007 9:59:46 AM
LAWMAN,
Where everyone loses their job except you.
:o)
Posted by: John | Apr 27, 2007 10:08:49 AM
Lawman-
You couldn't be more wrong. I have seen plenty of trial attorneys with flair, but none who didn't know who had the case (judge or jury) at what time, and there are PLENTY of judges who like to "run their courtrooms" an area that appellate judges give WIDE LATITUDE, HAVING BEEN THERE THEMSELVES. Nice try.
Posted by: MarkM | Apr 27, 2007 10:14:14 AM
So, Bank of Mexico raised interest rates by .25% as "preventive measure". Anybody has ideas to share?
Posted by: mhm | Apr 27, 2007 10:21:16 AM
Meanwhile how does S&P react to measly growth and 4% inflation? Down a whopping 4 points.
Take a look at this story about how the falling dollar is propping up earnings.
http://www.cnbc.com/id/18328850
Posted by: js | Apr 27, 2007 10:21:34 AM
