Jack Dunn - Reclaiming Common Sense

The most significant trailing economic indicator is the Gross Domestic Product Report. The GDP report is released on a quarterly basis. The first report is the "advance" report and receives the most attention. The Preliminary GDP number is the first revision to the data. This report garners some attention. The third report is the "final" revision to the current quarter's GDP number. It isn't really final because there are annual revisions to the data and a once every five year revision comprehensive data revision. This comprehensive revision was last performed during 2013. There will be a revision the National Income and Products Account (NIPA) data with the release of the Advance Second Quarter GDP report at the end of July.


There is a considerable amount of discussion as to whether or not the Advance Second Quarter will show improvement or weakening. There are two numbers to observe, the annualized GDP number, how the economy could grow if it grows for four quarters at the same rate as it did during the current quarter, and the REAL GDP value, the rate at which the economy grew during the past four quarters.  The Real GDP number is truly rearward looking. The annualized GDP number is a crapshoot. First Quarter normally is the slowest quarter of a year. The boost that the second quarter receives is from the low starting point of the first quarter. 


The first quarter GDP number was broadly reported as being weak.The problem is that it was not widely reported that the annualized value  of 1.2% was better than what we saw during six of the past ten years. What should we expect to see this week? What should we expect to see next month?


Watch the Gross Private Domestic Investment and Personal Consumption Expenditure Revisions. The United States Economy is a Consumption based economy. The Monthly MARTS retail report recorded strength this past month and places the economy on a higher pace of retail sales than we have ever seen. We are doing better than we were during May of 2015 or May of 2016. Non-residential PDI spiked by almost 12% during the first quarter of this year. We saw a spike of over 26% for Structures during the first quarter. If corporations are investing in structures then we may see other investments - in people - through jobs. There was also a growth of over 7% in PDI equipment. That equipment number was negative from 2015Q4 through 2016Q3. What changed during the fourth quarter of 2016? The election.


Exports and Imports have been improving. Last year BRexit occurred and the value of the pound "took a pounding." Exports improved by 1.8% during 2016Q2 and 10.8% 2016Q2. This year the 2017Q1 improvement was over 5%. Imports have increased the past four quarters.


Personal Consumption Expenditures have been soaring for the past four quarters. We have not seen an expansion of personal consumption from 2013 through the first quarter of 2017, other than the first quarter of 2014. This is confirmed by what we have seen from the May MARTS report.  Remember that we have seen upward revisions to the retail sales of March and April with the May MARTS report. Only March is included in the first quarter GDP data. This means that the upward revisions to the April data will be reflected in the 2017Q2  report.


The net-net is the official Annualized GDP value should rise for the first quarter, and second quarter.  Will it be revised as high as 2010Q1? Will we see a value closer to 2.0% than 1.0%? Most likely. Second quarter GDP should exceed 2.0%. Will it hit the 4.0% we saw during 2014Q2? Probably not. That Bounce was created, in part, by a negative 1.2% GDP contraction during 2014Q1. A lower starting point allows for a higher finishing point. The second quarter pace will, therefore, in part be impacted by the "final first quarter" GDP rate.I said in a tweet last week that I believed that the Second quarter GDP Annualized rate of growth could be over 3%. Will it hit 4.0% as it did during 2010 and 2014? 


Real GDP was 2.0% and should be revised higher. If the metrics of Personal Consumption Expenditures (PCE,) Gross Private Domestic Investment (GPDI,) and the Import Export data is examined on an annual basis, the Real GDP number has improved for three consecutive quarters. PCE of Goods and Services are Up. Durable goods are growing at an annual rate in excess of 7% and have done so the past two quarters. Non-residential structures and equipment investments have been growing . Structures had been contracting, on an annual rate, for seven consecutive quarters. Exports are up. Imports are up. The preliminary 2017Q1 GDP number should be revised higher to 2.1% to 2.3%.The trend is our friend. I also tweeted out that I believed that the 2017Q2 should be in the 2.4% to 2.6% range.


Are we seeing Growth Similar to 2005-2007? Not yet. The automobile sector is chugging down the road at a good clip, according to the MARTS data. The new home sales data is being impeded by a lack of inventory, even with a large number of units under construction. The number of existing homes being sold is rising, even with a lack of inventory there, too. Workforce participation has stabilized after years of overall decline. Full-time jobs are being added as part-time jobs and the number of unemployed workers fall. If we see another upswing in participation and we approach the levels of 64-66% percent then we will see more imports being bought, more exports being made, more investment in private domestic investments, and most importantly we will see growth in personal consumption expenditures. Watch the revisions.


It's the economy.