Yesterday, the government revised the economy's first-quarter contraction from the annualized 0.7 percent it reported in May to 0.2 percent.
In covering that news, the Associated Press's Christopher Rugaber spent most of his report speculating about the second quarter's impending "rebound" as if its existence is absolutely certain, citing only the items which would cause readers to believe that's the case. There are several reasons to be quite concerned about the second quarter and the general direction of the economy — even if some of them are somehow not yet showing up in the gross domestic product figures.
It's quite interesting to note, given yesterday's revision back to barely negative, how little talk there has been of "residual seasonality" — the theory that the government's Bureau of Economic Analysis is not fully seasonalizing every element of GDP properly during each calendar year's first quarter and therefore understating growth.
When the contraction was larger and looked like it might get worse, concerns about "residual seasonality" were rampant. Perhaps those pushing "residual seasonality" would rather not be reminded that first-quarter GDP figures only tend to trail the other three quarters of the year during Democratic presidential administrations — for fairly obvious reasons.
As I will show shortly, the seasonality problems people should be worrying about appear to be working in the direction of making the second quarter look better than it really is.
Here are key passages from Rugaber's report (bolds and numbered tags are mine):
US ECONOMY NOT AS BAD IN 1ST QUARTER, PAVING WAY FOR REBOUND
The U.S. economy contracted in the first three months of the year, just not as much as previously estimated. More recent data show that the weakness was largely temporary, with a rebound in the works for the April-June quarter.
The economy, as measured by the gross domestic product, shrank at a seasonally adjusted annual rate of 0.2 percent from January through March, the Commerce Department said Wednesday. That's better than last month's estimate of a 0.7 percent decrease.
Harsh winter weather slowed spending by keeping consumers away from shopping malls and auto dealerships. The trade deficit ballooned, slicing growth by the most since 1985 as exports fell and imports rose.
... Forecasting firm Macroeconomic Advisors predicts growth will reach 2.7 percent in the second quarter. [1] And many economists agree with (BMO Capital Markets economist Sal) Guatieri that growth should reach 3 percent in the second half of the year.
... The economy appears to be on track for another year of modest 2 percent to 2.5 percent growth.
That's far below the optimism at the beginning of the year, when lower oil prices and healthy hiring led many economists to forecast growth above 3 percent. The economy hasn't reached that level in a decade. [2]
... consumers stepped up their spending in May, and home sales are climbing - signs that the economy is back on track. In addition, many of the headwinds the economy faced in the first quarter - from an increase in the dollar's value to spending cutbacks by oil drillers - are fading.
"Growth should remain near 3 percent in the second half of the year as the dampening effects of a strong dollar and oil industry slump fade," Sal Guatieri, an economist at BMO Capital Markets, said in a note to clients.
... there have been signs that Americans are opening their wallets again. That should provide a crucial boost to growth in the second quarter and the rest of the year. Consumer spending accounts for 70 percent of economic activity. [4]
... Sales at retail stores and restaurants jumped 1.2 percent in May, [3] as shoppers spent more on clothes, building materials and furniture.
Notes:
[1] — The Macro Economic Advisers forecast is higher than the Federal Reserve Bank of Atlanta's current estimate of 2.1 percent, which is worth mentioning because FRB Atlanta virtually nailed the original first-quarter estimate two months ago. Macro Advisers and others missed by a significant amount.
[2] — More to the point, Chris, the economy hasn't seen annual growth of over 2.5 percent since 2006, the last in a string of four consecutive years during which growth exceeded that figure and averaged 3.1 percent (compounded). Since the recession officially ended, the Obama adminsitration and its economic policies have had five shots (2010 through 2014) to do better, and has failed. It looks like this year will be the sixth consecutive inexcusable underachievement.
[3] — Rugaber's citation of the retail spending increase is quite interesting, because that figure appears to be overstated based on the underlying raw data.
As I noted at NewsBusters two weeks ago, the conversion to the government's seasonally adjusted increase of 1.2 percent looks wildly overstated:
As I noted in that post, referring to an item at my home blog the previous day:
... it's more than a little difficult to understand how "the smallest actual April to May percentage increase in the past four years somehow generated the BEST seasonally adjusted increase — by miles." An absolutely flat seasonally adjusted result would have been perfectly defensible.
My discussions with the BEA indicate that it uses seasonally adjusted retail sales data in compiling GDP without bothering to look at the underlying raw data. If that's really true, it's an effective admission that it will be feeding at least one unrealistically high retail sales number into its second-quarter GDP calculations.
[4] — While it makes up 70 percent of GDP as the government compiles it, consumer spending is emphatically not "70 percent of all economic activity." GDP is defined as "the value of the production of goods and services in the United States, adjusted for price changes." Consumer spending represents consumption, not production. Although what the government does to compile GDP reflects the best available methodology, its awkward estimates use consumption data and and then adjust it for items like inventory change, exports and imports to get to its best guess as to what "production" really was.
Understanding that GDP is supposed to reflect what is actually produced is important for two reasons.
The first is that policymakers who forget or ignore this fact think that using the bully pulpit to tell consumers to "spend, spend, spend" increases GDP as it's truly defined. It doesn't. Consumer spending will only increase GDP in the long run if producers and service providers respond by producing more. They will only produce more if they believe that the spending increases are permanent and not the result of government or others' jawboning.
The second is that sometimes one has to look below the topline GDP numbers to see what is really happening to production. If the production figures don't jive with increases in consumer spending, there may be reasons for concern. This is likely one of those times.
Reviewing posts at my home blog just for this month, here are instances where reported production-related figures have come in at troubling levels:
- Durable Goods Orders — Trailed the same month last year in February, April and May. Total orders through May are 2.2 below last year's first five months. Actual orders in May 2015 alone were over 5 percent below May 2014. May's seasonal conversion in this metric is also very questionable.
- Industrial production (seasonally adjusted) — has fallen by a 1.1 percent during this year's first five months, with 0.7 points of that decline occurring in April and May.
- Wholesale Sales — were down year-over-year in April, the latest report available, for the fourth straight month.
- Productivity — two straight quarters (4Q14 and 1Q15) of significant declines totaling an actual 1.3 percent (i.e., not annualized).
- Factory Orders — Have trailed last year's comparable month for six straight months through April (latest available data is through April) by a cumulative 4.5 percent.
- Factory Shipments — Have trailed last year's comparable month for six straight months through April by a cumulative 2.4 percent.
These figures all to some extent impact production, i.e., what GDP really is. They've all been going in the wrong direction for a sustained time period. Absent strong contrary evidence, they are all indications that the nation may be in the midst of a protracted economic contraction, and that the consumption-focused GDP calculations haven't yet caught up to that reality.
Perhaps we'll see some of this disconnect resolve itself when the BEA releases revised GDP figures for the past several years as part of its first estimate of second-quarter growth in late July. Regardless, the kinds of declines we're seeing in production-related measurements cannot exist in the same universe as significantly positive GDP numbers for very long. There's a big problem with one or the other — but you'd never know any of that from reading the sunnyside-up reports we typically see from the AP and the other business wires.
Cross-posted at BizzyBlog.com.
