Monday, January 31, 2011

Q4 GDP - A Look Inside

GDP missed with a 3.2% read versus the estimates of 3.5%.  Looking purely at the highlights, two things stood out.  First, the drawdown in inventory for the first time in five quarters.  Inventory was a net drag on GDP by 3.70%.  The second and probably more eye catching stat was the Final Sales figure which showed a solid rise to 6.87% from a prior read of .94%.  So at the headline level although a miss, the report showed some positives.

Like anything though you need to read behind the headline to find the true story.  Without making GDP to confusing, let's break it down to the simple formula

GDP = Consumer (C) + Investment (I) + Government (G) + Trade Balance (T)

The chart below shows how each component of GDP have changed over the past eight quarters.   The two areas that standout are the changes in (I) investment and (T) trade.  We did notice (G) government begin to turn down and become a net drag on GDP and we also saw (C) consumer tick up adding more to GDP growth.  For the most part though (I) & (T) were the largest fluctuations.

The Trade component was a little confusing as it showed an increase in exports which makes sense considering the dollar debasement, but a substantial decrease in import growth by 2.40%.   The drawdown in inventories would be offset partially by the drawdown in imports but the amount was larger than would be expected considering the fact that the consumer showed strength this holiday.  GDP is quoted in real terms (inflation adjusted) from nominal values.  The BEA uses different price deflators in this adjustment and the deflator for imports is much larger than that of GDP as a whole (.3% for GDP and 21.8% for imports).  So part of this trade benefit to GDP was purely using an uneven price deflator that favored GDP versus imports.

The Investment component which is where inventory resides, showed the first drawdown in inventory levels in five quarters.  Odds are this is not a blip but rather a trend where inventory will continue to be a drag on GDP.  Until real demand comes back into the economy the desire to build GDP to higher levels will not be there.   So as inventory levels stagnate or reduce further based on sales, the (I) investment component of GDP should put more downward pressure on GDP.

The table below shows the past eight quarters and a breakdown of GDP by various components. 

Another way of calculating GDP is using final sales and changes in inventory. 

GDP = Final Sales + Changes in Inventory

In other words, Final Sales = GDP - Changes in Inventory.  As a result the big drawdown in inventory resulted in a big rise in final sales.   The graph below shows final sales over the past eight quarters.  Seems rather hard to have full faith in this GDP calculation method with final sales going up in one quarter from .94% to 6.87% (that's quite a trajectory).  Graph of final sales over the past eight quarters is below.

So on the surface GDP was a miss but looked OK.  Behind the headlines though questions do arise.  It's also important to note that this is the first of three more revisions to GDP.  For most of the report there are only two months of data (October and November) with December being more of an estimate.  


No comments:

Post a Comment