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Gross Domestic Product Report: An Overview on Reading it


Release Date: Quarterly

The Gross Domestic Product number, put out quarterly by the Bureau of Economic Analysis, is broadly speaking a summation of the aggregate total goods and services produced by the United States over the course of a quarter.

The “advance” number comes out about four weeks after the end of the quarter that it tracks. The “preliminary estimates” follow in the next month. And the “final” numbers are published about three months after the quarter ends. This report catalogues consumer spending, business and residential investment, and price (or inflation) indexes.

The report is arguably the second most influential economic indicator after the BLS jobs report. Most market participants encounter this number in an abbreviated format such as this:

GDP

Prior

Consensus

Consensus Range

Actual

Real GDP - Q/Q change - SAAR

0.2 %

-0.8 %

-1.0 % to -0.2 %

-0.7 %

GDP price index - Q/Q change - SAAR

-0.1 %

-0.1 %

-0.1 % to -0.1 %

-0.1 %

These numbers above constitute part of the second revision of the GDP report for the first quarter of 2015, published on May 29, 2015.

“Real GDP” means a reading with reference to the prices at one predetermined time, in this case, 2009. This “real” figure is also referred to as “without the influence of inflation.”

The -0.7% contraction above is widely seen as disturbing, especially because this is the third year out of the last five in which the economy has recorded a contracting GDP number in the first quarter—all this while the U.S. economy is reputedly in recovery.

This number was reduced in large part from the first “advance” reading because the nation’s trade deficit widened, part of the effect of a strong dollar and the disruptions in the West Coast ports. Other factors contributing to the first quarter’s slowdown include a rougher than average winter and dramatically lower capital expenditures in the energy sector.

Perceived Faulty Seasonality Issues

Many investors and media pundits think that the contractions evident in the last two sets of Q1 GDP numbers present a problem. All of the most widely published and quoted GDP figures are “seasonally adjusted” so that investors and analysts can identify larger trends minus the repetitive seasonal influences that recur at the same times and in similar magnitudes every year.

These observers maintain that if  Q1 GDP numbers in the last seven years have averaged an annualized 1.9% lower than the other quarters, then the seasonalization process isn’t doing what it is supposed to be doing.

Every year, consumers spend robustly in November and December, and every year winter weather slows things down during the first quarter. Seasonal adjustments should excise these predictable patterns to reveal in what direction the economy is headed.

In 2015, of course, a number of new developments conspired to exacerbate the usual economic doldrums: the strong dollar, a retreating energy sector, and the West Coast ports strikes. Michael Gapen, chief U.S. economist at Barclay’s, has been widely interviewed on this issue and seems to have hit a chord when he said, “We believe growth [in the first quarter] has systemically underperformed due to an incomplete seasonal adjustment process that leaves residual seasonality in many investment categories.” (Wall Street Journal, 5/29/2015).

The BEA is entirely in agreement with this assessment, even using some of the same wording:

“The Bureau of Economic Analysis (BEA) is working on a multi-pronged action plan to improve its estimates of gross domestic product (GDP) by identifying and mitigating potential sources of “residual” seasonality.

That’s when seasonal patterns remain in data even after they are adjusted for seasonal variations…. As a result of this ongoing work, BEA is aware of the potential for residual seasonality in GDP and its components, and the agency is looking for ways to minimize this phenomenon.” (blog.bea.gov)

This will be a big change for the BEA, in part because much of the data that comes to the BEA has been seasonally adjusted by its original sources; they will have to finish the job in many cases.

The BEA says they will have completed its first updates to their methodology by its June 30th, 2015 report. This entire episode can also be seen as an object lesson in the power that government statisticians have in shaping people’s views on the current health of the economy.

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