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March 25, 2016 | 4th Quarter “Final” GDP Estimate 1.4% – Expect Revisions

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Today the BEA released its third estimate of 4th Quarter 2015 GDP.

Fourth quarter GDP purportedly increased from 1.0% in the second estimate to 1.4% in the third.

The BEA used to label the three estimates as advance, preliminary, and final. Now it’s just 1-2-3. That was a good move because there is nothing final about any of this.

This July we will see GDP revisions dating back 10 years thanks to a BEA admitted processing error!

Let’s start with a look at what the economists thought heading into today’s GDP report. The Bloomberg Econoday Consensus for fourth quarter GDP was 1.0%, seasonally adjusted annualized (SAAR).

Q: How did the economists arrive at 1.0%?
A: They looked at the second (preliminary) estimate and accepted it.

In this case, I don’t blame them. GDP is nothing but a reporting pot-shot anyway.

Highlights

Real GDP came in stronger than expected in the fourth quarter, at an annualized plus 1.4 percent for the third estimate vs expectations for 1.0 percent. The second estimate was also 1.0 percent with the first estimate at plus 0.7 percent.

The third estimate got a boost from an upward revision for personal consumption expenditures which came in at a respectable 2.4 percent annualized rate for a 4 tenths increase from the prior estimate (a similar rate for the first quarter would be welcome). Residential fixed investment gave a 10.1 percent boost to the quarter, offset in part by a 2.1 percent decline on the non-residential side. Net exports cut 0.14 percent off the quarter, an improvement from minus 0.25 and 0.47 in the prior two estimates. Inventory cut 0.22 percent. Final sales came in at 1.6 percent, up 4 tenths from the initial estimate. Inflation was muted with the price index up 0.9 percent and the core up 1.3 percent.

Estimates for the first quarter are trending roughly at the 2 percent area, pending that is personal income and consumption data for February which will be posted Monday.

Recent History

The third estimate of fourth-quarter GDP is expected to come in unchanged from the second estimate at a plus 1.0 percent annualized rate. But gains for the quarterly services survey could give a boost to personal consumption expenditures which slipped to an annualized plus 2.0 percent in the second estimate vs 2.2 percent in the initial estimate. A gain here, even though it’s data for the fourth quarter, could improve the outlook for consumer spending. Other readings in the fourth quarter included weakness in non-residential investment that was offset by strength on the residential side. The GDP price index is expected to remain unchanged at plus 0.9 percent.

Spending Expectations

Bloomberg states a gain in consumer spending vs second estimate “could improve the outlook for consumer spending”.

Why would it?

Let’s remind Bloomberg of its own reports, and my take on its reports in which Bloomberg noted “respectable strength” in consumer spending.

Please consider these snips from Retail Sales Down, January Sales Revised to -0.4%

Respectable Strength?

Retail Sales 2016-03-15

It’s amusing watching Econoday attempt to spin every conceivable thing positive. Somehow, retail sales at -0.1% on top of a huge downward revision is allegedly indicative of “respectable strength in February”.

Reader Tim Wallace pinged me with this pertinent comment: “Down 0.1% in January means February retail sales were actually down 0.7% from January’s initially reported number.

Respectable Not!

Revisions Coming Up

If revisions to October, November, and December consumer spending changed anyone’s outlook for what’s happening now, they surely aren’t thinking clearly.

Speaking of revisions, more are coming up in July. We will see GDP revisions dating back 10 years thanks to a processing error on construction spending.

That processing error primarily affected GDP for 2014 (up) and 2015 (I believe down). For details please consider Diving Into the Revisions: Construction Spending Revised Lower 7 Consecutive Months! 2015 GDP Will Decline vs. Estimates: By How Much?

My guess is 2015 GDP will go down by about 0.50 percentage points. That is admittedly a stab.

Assuming I am in the ballpark, then today’s statement from the BEA “Real GDP increased 2.4 percent in 2015 (that is, from the 2014 annual level to the 2015 annual level), the same rate as in 2014.” will drop, perhaps to under 2.0%.

This will all happen in July, long after everyone has forgotten about it.

What About Recession?

For those who are positive these GDP estimates “prove” we are not in a recession now, please consider my July 30, 2010 report GDP: 3 Years of Massive Downward Revisions.

After the next recession, whenever they finally admit it, there will be more massive years-after-the-fact revisions.

From today’s perspective, there is little reason to have much faith in these reports, and absolutely no reason to believe they say anything about consumer spending estimates going forward.

Mike “Mish” Shedlock

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March 25th, 2016

Posted In: Mish Talk

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