U.S. GDP: The Upward Revisions That Seem Like a Downer

GDP GROWTH	2006 Q1	2006 Q2	2006 Q3	2006 Q4	2006 Q4	2006 Q4
Actual/A,P,F	Actual	Actual	Actual	Advance	Prelim	Final	Yr/Yr
Real GDP	5.6%	2.6%	2.0%	3.5%	2.2%	2.5%	3.1%
PCE	4.8%	2.6%	2.8%	4.4%	4.2%	4.2%	3.6%
Durables	19.8%	-0.1%	6.4%	6.0%	4.4%	4.4%	7.4%
Nondurables	5.9%	1.4%	1.5%	6.9%	6.0%	5.9%	3.7%
Services	1.6%	3.7%	2.8%	2.9%	3.3%	3.4%	2.9%
Business Invst.	13.7%	4.4%	10.0%	-0.4%	-2.4%	-3.1%	6.0%
Structures	8.8%	20.3%	15.7%	2.7%	-0.8%	0.9%	11.2%
Equipment	15.6%	-1.4%	7.7%	-1.8%	-3.1%	-4.8%	4.0%
Housing	-0.3%	-11.1%	-18.6%	-19.2%	-19.1%	-19.8%	-12.8%
Inventories($B)*	$41.2	$53.7	$55.4	$35.3	$17.3	$22.4	$35.4
Farm	$4.3	$1.9	$2.5	$2.1	$2.4	$2.4	$1.5
Nonfarm	$36.8	$52.2	$53.3	$33.4	$14.6	$20.0	($24.8)
Net Exports($B)**	($636.6)	($624.2)	($628.8)	($581.4)	($585.1)	($582.6)	$54.0
Exports	14.0%	6.2%	6.8%	10.0%	10.5%	10.6%	9.4%
Imports	9.1%	1.4%	5.6%	-3.2%	-2.2%	-2.6%	3.3%
Government	4.9%	0.8%	1.7%	3.7%	3.3%	3.4%	2.7%
Real Final Sales	5.6%	2.1%	1.9%	4.2%	3.6%	3.7%	3.3%
For Yr/Yr: * average, ** Change from Yr ago Qtr

GDP and its main components are displayed in the table above. The most recent four quarters appear in the table as well as the three passes at estimating GDP in the current quarter and the current Yr/Yr value. GDP is still growing by more than 3% Yr/Yr. Q4 GDP’s estimate has fluctuated starting out at 3.5% dipping to 2.2% and now finalizing at 2.5% - that is we call this the final estimate for GDP. It is until benchmark revisions are done. In some sense GDP is never really finalized, but we call this the final estimate. The final estimate was made stronger mainly due to stronger inventory growth and weaker imports. Since imports subtract from GDP, weaker imports boost GDP. But imports are a function of the strength of domestic demand. So, weaker imports also are an indication of weaker domestic demand conditions. The slippage in capital spending in the final estimate on equipment and software is another example of fundamental weakness that is obscured by the upward revision to GDP in 2006-Q4. On balance, after revision, GDP is stronger but its trend looks weaker.

The chart on the left contains the Q/Q as well as the Yr/Yr plot for GDP to show trend and volatility. On it you can seen that GDP growth is still gradually eroding, but amid enough volatility to make the trend less than certain.

The GDP report highlights the recent statement made by the Fed Chairman about how the outlook has become more uncertain. While this report shows strong consumer spending, the consumer has been sluggish early in 2007, business investment is much weaker than expected, too. Inventories are in an irregular downtrend. A contracting (real) trade deficit, made up of firm exports and withering imports, has added strength to an otherwise lackluster economy. As we look ahead, it is clear that the economy needs a pick-up from some sector. Certainly the consumer must do better. But with housing askew the economy can ill afford for the business sector to be a drag on growth. Yet that is precisely what appears to be in train for the first quarter.