"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."
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).
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 . . .
* Note that some forms of government payments — social security, medicaid, etc, are not included in GDP’s formula.
Heady Stocks Leave Economy On the Ground
WSJ, April 27, 2007; Page C1
News Release: Gross Domestic Product and Corporate Profits