Higher GDP Largely Ignored by the Markets

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Gross domestic product (GDP) is how economists, consumers, politicians and academia all measure economic growth. GDP in the United States is dominated handily by consumer spending. And the hope after the election is to get GDP growth from a baseline of 2% or less to 3% or higher. Thursday’s economic reports included a final revision for the fourth-quarter 2016 GDP, with a revision up by 0.2% to a gain of 2.1%.

The consensus estimate from Bloomberg was for GDP to have ticked up to 2.0%, and the prior estimate, which was a revision, was growth of 1.9%. Current-dollar GDP increased by 4.2% in the fourth quarter, up by $194.1 billion, to a level of $18.8694 trillion.

A boost of 3.5% in consumer spending, again which dominates U.S. GDP calculations, was the major culprit for the slightly higher revision. The Bureau of Economic Analysis (BEA) said:

The upward revision to the percent change in real GDP primarily reflected upward revisions to PCE and to private inventory investment that were partly offset by downward revisions to nonresidential fixed investment and to exports. Imports, which are a subtraction in the calculation of GDP, were revised upward.

Spending for services also rose 2.4% from a prior estimate of 1.8%, and the growth in nondurable goods spending was raised to 3.3%, versus a prior estimate of 2.8%.

Durable goods spending was driven by strong vehicle sales, rising by to 11.4%, but this was actually down one-tenth of a percentage point from the previous estimate.

While the final revision was a higher GDP reading, the report had a negative from a $3.4 billion higher revision to business inventory accumulation to $49.6 billion during the fourth quarter. While it adds to GDP, heavy inventories at the end of the fourth quarter can weigh on business orders during the slower first quarter of each year.

Another $5.4 billion widening out of the revision for net exports came in at −$605.0 billion. This means fewer exports than expected versus higher imports. Part of that may have been strength in the dollar.

Nonresidential fixed investment was lowered to 0.9% from a prior 1.3%. Residential investment remained strong at 9.6%, and that was after two straight drops in prior quarters.

Government spending was revised down to 0.2% from a prior estimate of 0.4%.

The GDP price index was revised up one-tenth of a point to 2.1%, which may help the Federal Reserve’s 2% inflation target ambitions. Core price, which excludes food and energy (similar to the consumer price index), was revised higher by one-tenth of a point to 1.8%.

For 2016 as a whole, the measurement of real GDP increased 1.6%, versus an increase of 2.6% in 2015. The BEA said:

The increase in real GDP in 2016 reflected positive contributions from PCE, residential fixed investment, state and local government spending, exports, and federal government spending that were partly offset by negative contributions from private inventory investment and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP from 2015 to 2016 reflected downturns in private inventory investment and in nonresidential fixed investment and decelerations in PCE, in residential fixed investment, and in state and local government spending that were partly offset by a deceleration in imports and accelerations in federal government spending and in exports.

While these numbers are important to see, the reality is that the final revisions to GDP calculations never really matter to the markets. These already have been seen, and they reflect the election quarter and were before the changes in the White House.