February 1, 2015, GDP Review: Context for Friday’s GDP Report

First Estimate of Fourth Quarter Data

The Bureau of Economic Analysis (BEA) reports that real gross domestic product (GDP) growth in the fourth quarter slowed to an annualized 0.7%, considerably lower than the modest 2.0% growth in the previous quarter and barely registering above the 0.6% growth in the first quarter. This compares with the Atlanta Fed’s GDPNow forecast of 1.0% real GDP growth. The Wall Street Journal expected 0.8%.

Sources: BEA, Haver Analytics, Atlanta Fed, Blue Chip, Wells Fargo Economics Group.
*Note: Post-1960 recovery average from recessions lasting longer than 1 year, excludes current recovery.

In December, the Federal Open Market Committee (FOMC) updated its median forecast for 2016 real GDP growth marginally higher from 2.3% to 2.4%, but lowered its longer run range estimate to 1.8%-2.3% from 1.8%-2.7%.

Context

The initial estimate of fourth quarter GDP affirms the slower growth for 2015 that many analysts and forecasters were expecting. Weakness in energy, exports, durable goods, retail sales and excess inventories demonstrate the extensiveness of tepid growth across the economy.

• Lower oil prices have unsurprisingly continued to weigh on growth. Spending on nonresidential structures and equipment makes up most of energy producers’ costs, including drills and property, and can affect GDP data if the decline is large enough despite the industry’s relatively small size.
• Retail sales fell 0.1% in December and grew only 2.1% over the year compared to the 3.9% gain seen in 2014. Durable goods orders fell a sizeable 5.1% in December and declined 3.5% in total for 2015, confirming negative effects from a slowing energy sector, weak global demand, the strong dollar, and inventory overhang.
• While inventories have pulled down on GDP growth as businesses slow down considerably on stockpiling their products, this may suggest a resettling to more sustainable, manageable inventory levels.

Fourth quarter data still has two revisions to go before arriving at a final estimate. For the previous third quarter real GDP growth, the first estimate of 1.5% was revised upward by 0.6 percentage point for a second estimate of 2.1% and was ultimately revised to 2.0% in the third and final estimate.

Fourth Quarter Details

The deceleration in economic growth was notably widespread amid the contributing factors. Among positive and negative contributions to GDP this quarter, the release notes that:

• The slowing in GDP primarily resulted from slower personal consumption expenditures and a downturn in nonresidential fixed investment, exports, and state and local government spending.

• Despite slowing, positive contributions occurred principally in personal consumption expenditures, residential fixed investment, and federal government spending.

• Negative contributions resulted from imports and declines in private inventory investment, exports, and nonresidential fixed investment.

Economic Indicators

The economic data in the following table represents a sample of economic activity over the course of the fourth quarter. Forecast estimates for GDP growth are predicated upon these releases, as they reveal a little more about the economy with each month of new data. For some indicators, data for December has not yet been released.

Source: Haver Analytics.

The Bigger Picture

Relatively stronger employment growth in the final months of 2015 appears to mismatch the anemic GDP growth for the final quarter. What remains unclear is whether a rebound is to follow, or if the United States will see another sluggish quarter in the beginning of 2016.

• The Federal Reserve raised the target federal funds rate in December for the first time in nearly a decade, but following the FOMC meeting announcement last week, central bank officials appeared less sure about additional increases in 2016. In addition, data from the employment-cost index last week revealed a broader trend of persistently weak wage growth, which will also weigh on the Fed’s decision for the target fed funds rate trajectory.
• Weakness continues to plague the global economy, with the International Monetary Fund (IMF) cutting global growth forecasts for a third time in less than a year. The IMF revised estimates for 2016 and 2017 down by 0.2 percentage point to 3.4% and 3.6%, respectively.
• The manufacturing sector has taken a negative turn, as demand dropped sharply in 2015. Since this rarely occurs outside of a recession, one might question whether a recession is imminent. The Wall Street Journal notes that manufacturing is a relatively smaller share of the economy than in years past, and therefore may not stand as a signal of impending widespread layoffs and broadly lower economy activity.
• For now, more and more policymakers and forecasters are embracing the “new normal” of 2% economic growth. Gone are the expectations for robust economic growth hiding just around the corner, as the deliberations continue over why growth slowed down and how to generate stronger growth going forward.

Annual GDP

The BEA estimates that real GDP increased 2.4% in 2015 (as measured from the 2014 annual level to the 2015 annual level), matching the annual growth of 2014, above the 1.5% annual growth reported for 2013. Consumer spending was the largest contributor to growth, particularly spending on services and notably on healthcare. Business, residential, and inventory investments increased, as did exports and state and local government spending.

During 2015 (as measured from the fourth quarter of 2014 to the fourth quarter of 2015), real GDP increased 1.8%, compared with an increase of 2.5% during 2014. This measurement is preferred by the Federal Reserve and the Congressional Budget Office when projecting economic growth. In the latest projections, the median estimate by FOMC members for real GDP growth during 2015 exceeded the actual value by 0.3 percentage point at 2.1%. In its latest Budget and Economic Outlook released last week, the Congressional Budget Office also overestimated GDP growth during 2015 at 2.0%.

Revisions

With the first release of GDP data this year also arrives the annual revisions, which generally cover the three most recent calendar years and their respective quarters. The revisions incorporate newly available source data as well as improvements to concepts and methods to better measure the U.S. economy. Below are some key takeaways from this year’s revisions:

• Between the fourth quarter of 2011 and the first quarter of 2015, the average growth rate for real GDP was revised down 0.2 percentage point to 2.0%.
• Revisions to real GDP growth ranged from -2.0 percentage points (Q3-2012) to +1.2 percentage points (Q1-2014).
• In nominal terms, GDP was revised down a cumulative $183.7 billion over the 2012-2014 period.

Upcoming Key Releases

• The second estimate for fourth quarter GDP data, based on more complete data, will be released on February 26^th at 8:30am. This is also when BEA will report the estimates for gross domestic income (GDI), and the more reliable average of GDI and GDP.
• The third and final estimate for fourth quarter GDP data will be released on March 25^th at 8:30am.
• Fourth quarter and annual 2015 GDP by industry data is set for release on April 21^st at 8:30am.