Thursday, December 05, 2013

Comments on Q3 GDP and Investment

The BEA revised up Q3 GDP to 3.6% (from 2.8% in the advance release). The main reason for the upward revision was more investment in inventory (the contribution from "Change in private inventories" was revised up from 0.83 percentage points in the advance release to 1.68 percentage in the second release).

The change in private inventories tends to bounce around, and this will probably be a drag on Q4 GDP.

Note: The BEA provides a summary of revisions Real Gross Domestic Product and Related Measures: Percent Change From Preceding Period and Contributions to Percent Change in Real Gross Domestic Product.

Personal consumption expenditures (PCE) was revised down from a 1.5% annual rate to 1.4%, and residential investment (RI) was revised down from 14.6% to 13.0%. This is weak final demand (PCE and RI contributed 1.34 percentage point to GDP growth in Q3).  This is the weakest final demand since Q2 2011.

The good news is PCE will probably increase in 2014 with most of the impact of tax increases and budget cuts ending.  But Q4 2013 will probably be another weak quarter impacted by the government shutdown, a negative contribution from private inventories, and still weak final demand.

The following graph shows the contribution to GDP from residential investment, equipment and software, intellectual properties, and nonresidential structures (3 quarter centered average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue.

The dashed gray line is the contribution from the change in private inventories.

Investment ContributionsClick on graph for larger image.

Residential Investment (RI) made a positive contribution to GDP in Q3 for the twelfth consecutive quarter. Usually residential investment leads the economy, but that didn't happen this time because of the huge overhang of existing inventory.

Now RI is contributing - a good sign going forward since RI is historically still very low.

Overall this was another weak GDP report, but it does look like GDP will pickup in 2014.

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