Global| Apr 29 2019Q1 GDP-- Something Odd in the Numbers
Summary
The Bureau of Economic Analysis (BEA) estimated that Q1 real GDP rose 3.2% annualized, advancing almost a full percentage point above the consensus estimate of 2.3%. The headline gain in real GDP proved to be a big surprise, but the [...]
The Bureau of Economic Analysis (BEA) estimated that Q1 real GDP rose 3.2% annualized, advancing almost a full percentage point above the consensus estimate of 2.3%. The headline gain in real GDP proved to be a big surprise, but the composition of the gain was even more so.
According to the initial Q1 GDP data, the 3.2% gain consisted of a 6.5% gain in GDP goods, a 1.8% increase in services, and a 2.2% uptick in structures. The relatively large gain in GDP goods output is the outlier and deserves further examination.
GDP goods is a measure of domestic output and it includes all of the valued added from production through the distribution channels and also the items that end up in inventory. BEA uses a variety of source data to measures goods output since it includes final sales to consumers, businesses, government and foreign customers along with changes in inventory investment at the manufacturing, wholesale and retail levels.
In Q1, the 6.5% gain in goods output was comprised of 4.5% gain in real final sales and an increase of $32 billion in the rate of inventory investment, lifting the quarterly build in inventories to $128 billion, the largest quarterly level in four years.
What is odd about the large gain in GDP goods is that domestic production, as measured by the Federal Reserve Board, contracted 1.6% annualized in Q1, led by a large decline in motor vehicle output.
So the key question is how can final sales of goods rise and businesses add to overall inventory positions if there is no growth in the output of goods? The answer is that all of the real output growth occurred in the markup of valued added through the distribution channels with a big boost coming from falling prices.
BEA estimates that GDP goods prices contracted 0.6% in Q1, which means that nominal output of goods rose less fast than real output.
None of this is meant to imply that the Q1 GDP figures are wrong. BEA uses a variety of data sources and has much more information at their disposal to generate the GDP stats.
Yet, what the underlying data does show is that the headline output gains are not as impressive at they appear to be on the surface and that the decline in goods prices indicates companies are losing money on inventories, while also experiencing margin pressure as labor costs are rising above price and sales gains.
Although operating profits are not officially measured in the initial release on GDP one can guesstimate it based on the available data. According to the GDP data operating profits declined in Q1 relative to Q4 and that follows a small decline in Q4 over Q3. Overall profit levels are still relatively high but no longer advancing due to sluggish sales growth and rising costs. Thus, all of the gain in the equity market since the start reflects a relatively large increase in the market multiple.
Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.
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