As has been its habit during the Obama administration when the economy turns in a poor performance, the press's coverage of yesterday's report on U.S. economic growth focused on how much better next quarter's news will supposedly be. Especially in this instance, the beat reporters and pundits should have looked at whether or not yesterday's initial result will hold up, or whether it's likely to be revised downward.
The government's Bureau of Economic Analysis reported yesterday that the economy grew at an annualized rate of 0.7 percent in last year's fourth quarter. That's bad enough, but statements published by a leading GDP prognosticator before the BEA's release, once applied to yesterday's data, foreshadow a distinct possilbity that February's or March's revision will come in with a minus sign preceding it.
The keepers of Moody's Economy.com High Frequency GDP Model made the following very specific statement on Thursday before the report's release (still here at Moody's; full statement saved here for future reference, fair use and discussion purposes):
Let's compare Moody's predictions to the actual results:
- Inventory change subtracted only 0.45 points, compared to Moody's prediction of a 1.3-point hit.
- Meanwhile, final sales (which the government calls "final sales to domestic purchasers," seen near the bottom of Table 1 in the BEA report) only rose at an annual rate of 1.1 percent instead of the 2.1 percent Moody's predicted.
In other words, Moody's was almost dead right about the overall result because it was very wrong in opposite directions about inventories (understated the hit by 0.85 points [1.3 minus 0.45]) and final sales (overstated by a full percentage point [2.1 minus 1.1]).
There appears to be very little chance that final sales figure, or anything else relating to personal or business consumption, will increase to a signficant degree. The risk, based on weak Christmas season sales and tepid overall consumer spending, appears to be to the downside..
That leaves inventories. As I wrote yesterday at my home blog (with limited paraphrasing):
If Moody’s is ultimately right about inventories — and there are others who also expected an inventory effect roughly as large or larger — then future revisions have a very high chance of pulling fourth-quarter GDP into negative territory.
Specifically, if you take another 0.85 points away from today’s 0.7--point overall result, based on a projected 1.3-point inventory hit instead of the currently reported -0.45, you get a negative 0.15 percent reading.
Based on how the BEA calculates the inventory change effect, it reported that inventories in current dollars increased during the quarter by $19 billion (one-fourth of the reported $75.8 billion in the release, which contains annualized data). There is little evidence in hard-data economic reports that inventories increased by that much during the quarter. The best data available at the time of yesterday's release tells us that seasonally adjusted inventories fell by a combined $5.2 billion in October and November. (Inventories need to fall even further, as current levels are not justified by current sales levels.)
In other words, the hard data available tell us that Moody's estimate of a 1.3-point GDP hit is pretty reasonable.
The idea that GDP could go negative used to be considered news, but post-release reports at the Associated Press, Bloomberg and Reuters had nothing to say about what might happen in future revisions to fourth-quarter GDP. But each wire service told readers that the first quarter of 2016 or all of 2016 will supposedly be so much better:
- Associated Press, via reporter Martin Crutsinger, was, as usual, the most over-the-top — "... despite global weakness and shrunken oil and stock prices, many economists expect growth to accelerate on the strength of healthy job gains. ... most analysts said they expected the slump to be short-lived. ... For 2016, economists have forecast another year of modest growth of around 2 percent to 2.5 percent."
- Bloomberg's Victoria Stilwell was relatively restrained. But she found an "expert" with rose-colored glasses who made the following observation: "Looking ahead, 'it looks like inventories are in a better balance now,' said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York." How Mr. Feroli was able to make that observation is a mystery.
- Reuters, via Lucia Mutikani, engaged in predictable cheerleading — "But with the labor market strengthening and some of the impediments to growth largely temporary, economists expect output to pick up in the first quarter of 2016. First-quarter growth estimates are for now mostly above a 2 percent rate." She did acknowledge that "inventories could remain a drag on growth in the first quarter.
First, though, we need to see how much of an additional drag inventories will be in future revisions to the fourth quarter.
Cross-posted at BizzyBlog.com.
