On 1st Quarter GDP, Hold That Thought

From SmartMoney.com, the basics of the March report on personal income and outlays:

The personal income of Americans rose strongly again in March but their spending didn't meet expectations, while a key gauge of core inflation grew at a slower rate.

Personal income increased at a seasonally adjusted rate of 0.7% a second straight month, the Commerce Department said Monday. Originally, February income was seen up 0.6%.

March personal consumption grew 0.3% compared to the month before. Spending increased a revised 0.7% in February. Originally, February spending was seen 0.6% higher...

Spending on durable goods, those designed to last three years or longer, was unchanged in March, after falling 0.4% the previous month. Non-durable goods spending rose 1.0%, after a 0.4% climb in February. Spending on services decreased 0.1%, following a 1.1% increase in February.

That figure on services consumption is a bit eyebrow-arching, but overall it's hard to get too excited about this report, coming as it does on the heels of last Friday's advance figures for 1st quarter GDP. In case you haven't heard, it was not great:  Macro Man said Blah, Claus Vistesen said "ouch", and it hurt Dave at VoluntaryXchange to give the economy a "D" (to name just a few who were underwhelmed at the 1.3 percent annualized pace revealed by the Bureau of Economic Analysis).  William Polley has a nice round-up of other blogger comments, but I am with him in thinking that King at SCSU Scholars called it about right:

When this number is revised (and there will be two such revisions) the trade figure is the one that changes the most. So I expect this GDP estimate to be rather volatile to trade revisions.

The record does indeed show that the trade figures are apt to change as the numbers are re-crunched:

   

   

I wouldn't argue that the 1st quarter is likely to look anything other than weak when all is said and done, but I wouldn't carve that 1.3% in stone just yet.

Comments

[Steve]

The construction report released today provided the first adjustment (an improvement in this case) to Q1.

[calmo]

Startling graph of revisions...just housing slowdown related or were trade revisions always that wild? Time to play with the death/birth modelling a kill something, no?
We saw a huge revision in Imports for q4, yes? Sank that lofty, dreamy 3.5 (remember those days and how damned productive we were?) to 2.0 and then that almost cheerful bounce to 2.5 on just more generous consumption IIRC.
Well, will get a dead cat bounce this time as some of us are sobering up...and getting downright thrifty. [thrifty: (archaic): a penny saved is so stupid].

[Sampler]

This downturn reminds me of the 70,73,80 downturns interestly enough. Consumption lead downturns.

I wouldn't be surprised consumption is revised downword and residential investment as well.

[Dave Tufte]

Sorry - poor writing on my part.

I wasn't hurt by having to give the economy a "D" for the first quarter. I had in mind a jibe at the chicken littles who have been saying that 2.5-3.05 growth hurts when it really doesn't.

The nice thing about having a (grading) rule rather than (grading) discretion is that I don't have a time inconsistency problem related to who is in power and who is likely to win the next election.

[spencer]

Technical note: In the gdp the trade and inventory data measures the change from the end of the quarter to the end of the next quarter. in contrast the remaining data in the gdp accounts are the average of the three months data. So it is just inherent in the nature of the data that trade and inventory data will be more volatile.

This different treatment of the data grows out of what gdp is.
gdp is a measure of output.
However, it does not directly measure output. Rather it measures consumption and adjust that for changes in trade and inventories to indirectly measure output.

Because of this the frequent comment that personal consumption accounts for two-thirds of gdp is not really true.

[Alex Grey]

I think that the strong increase in the stock market averages is holding up consumer spending in the face of declining house prices. So we won't see a full blown recession until the stock market turns. This may seem a bit paradoxical as you would generally expect an impending recession to cause the stock market to turn.

However, the stock market can become disconnected from the economy if it is in a bubble – which I think it is. Margin debt on the NYSE is rapidly increasing is a parabolic increase similar to what was seen in 2000 and this is the key factor driving the stock market. In fact nominal margin debt is above the peak in 2000, while margin debt indexed by the CPI and GDP (neither is ideal, best would be the value of securities on the NYSE) is approaching the 2000 peak. The market seems heavily dependent on increasing margin debt e.g. the weakness in the stock market from late February -mid-March was associated with stabilising margin debt (i.e. no increase). This gives a foretaste of what might happen in the increase in margin debt were to stop.

This leads to the following chain of reasoning:
1) margin debt cannot increase in a parabolic fashion for very long;
2) spikes in margin debt have not been followed by plateaus in the data series going back to 1959 but rather declines;
3) The spikes in margin debt in 2000 and now dwarf all previous spikes;
4) 1) and 2) suggest that the stock market will turn fairly soon unless margin buyers are replaced by other buyers e.g. institutions. This seems unlikely as institutions are not likely to re-enter the market after a substantial gain driven by such a large increase in margin debt. 3) suggests that the turn could be substantial
4) When the stock market falls and it may fall precipitously, there is likely to be a strong reaction on the part of consumers who have been living fairly precariously for quite a while (first depending on home price appreciation for their savings; now switching back to dependence on the stock market). The result will be a rapid descent into a recession.