Economic Monitor – Weekly Commentary
by Scott J. Brown, Ph.D.

Gross Domestic Product

July 24, 2017

Samuel Blodget was an early American merchant, amateur architect, and economist. He wrote Economica: A Statistical Manual for the United States, considered to be the first American book on economics. The modern concept of Gross Domestic Product was developed by Simon Kuznets in 1934. Methodology has changed over time, along with the economy, and the current measure is not without its flaws – but it is the broadest measure of the economy’s strength.

According to the Bureau of Economic Analysis, the National Income and Product Accounts provides “a comprehensive view of U.S. production, consumption, investment, exports and imports, and income and saving.” As we all know from Econ 1, Gross Domestic Product measures the value of the goods and services produced by the U.S. economy in a given time period (usually quoted as quarterly at an annual rate). Real (constant $) GDP is simply nominal (current $) GDP adjusted for inflation.

GDP is made up of many components, each with their own methodologies. Details arrive over time. The advance GDP estimate, which is released in the month following the end of the quarter, is based on preliminary data. The 2nd estimate, released a month later, is based on more information. The 3rd is a more complete picture. As we see regularly, the reported GDP growth figure can change a lot with each estimate, but the underlying story typically does not change much.

Once a year, in late July, we get annual benchmark revisions to the GDP data. This can include methodology and definitional changes, but more often, the revisions simply reflect better estimates of the GDP source components. Such “garden-variety” revisions often shift growth from one quarter to the next, but not necessarily much higher or lower overall.

Note that GDP data are reported on a seasonally adjusted basis (unadjusted figures will begin to arrive with the 2018 benchmark revision). Over the last several years, there appears to have been some residual seasonality in the GDP figures. Specifically, first quarter growth figures have been significantly lower than in quarters two through four. That likely reflects a permanent change in behavior following the financial crisis. If there are permanent shifts in the seasonal pattern (for example, less variation in winter consumer spending as the population growth moves to the south and west), the seasonal adjustment will adapt over time. The Bureau of Economic Analysis is aware of seasonal anomalies and is working on it, but we won’t see residual seasonality removed until the 2018 benchmark revision.

Net exports and the change in inventories make up relatively small portions of GDP, but they account for more than their fair share of GDP growth. Fed Chair Yellen has stressed Private Domestic Final Purchases (PDFP), which is GDP less government, net exports, and the change in inventories (or equivalently, consumer spending, business investment, and residential investment) as a preferred measure of private domestic demand. PDFP is less volatile than GDP.

What do we expect for 2Q17 GDP growth? We started the quarter with high hope. Consumer spending growth, soft in the first quarter, was expected to rebound sharply. That rebound now appears to have fallen far short of expectations. Business fixed investment surged in 1Q17, with the rebound in energy exploration (capital intensive) accounting for more than 40% of that. Capital spending likely remained strong in 2Q17, but will almost certainly be less robust than in the first quarter. The mild winter appears to have pulled forward some of the seasonal gains in residential homebuilding (stronger 1Q17, softer April and May), but the trend is still higher. Inventory growth slowed sharply in the first quarter, subtracting more than a full percentage point from headline GDP growth. We have an incomplete inventory picture for 2Q17 and price adjustments are often difficult, but it looks as if we won’t get the kind of inventory rebuild that was anticipated at the start of the quarter. Foreign trade figures are often choppy, but the data in hand suggests that next exports may make a mild subtraction from headline GDP growth.

Interest and appreciation of Alexander Hamilton has been on the rise following Ron Chernow’s biography and Lin-Manual Miranda’s hit Broadway musical – and rightly so. Hamilton was a true visionary. Without him, the U.S. would not have its current financial system. Samuel Blodget, on the other hand, was eventually put in a debtors’ prison and died insolvent.

The opinions offered by Dr. Brown should be considered a part of your overall decision-making process. For more information about this report – to discuss how this outlook may affect your personal situation and/or to learn how this insight may be incorporated into your investment strategy – please contact your financial advisor or use the convenient Office Locator to find our office(s) nearest you today.

All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates (RJA) at this date and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete. Other departments of RJA may have information which is not available to the Research Department about companies mentioned in this report. RJA or its affiliates may execute transactions in the securities mentioned in this report which may not be consistent with the report's conclusions. RJA may perform investment banking or other services for, or solicit investment banking business from, any company mentioned in this report. For institutional clients of the European Economic Area (EEA): This document (and any attachments or exhibits hereto) is intended only for EEA Institutional Clients or others to whom it may lawfully be submitted. There is no assurance that any of the trends mentioned will continue in the future. Past performance is not indicative of future results.

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