Revisiting First Quarter GDP

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[Updated July 12 with additional information about net exports from a Twitter pal.]

The third estimate was released a few weeks ago. Real GDP growth increased from the first estimate’s 1.1 percent to 2.0 percent. The question is the source of that 0.9 percentage point increase.

A Quick Digression

Gross domestic product is estimated.  GDP is the money value of all goods and services produced in an economy during a calendar year.  Adding up GDP from the very lowest level of production is impossible.  Therefore, the Bureau of Economic Analysis estimates GDP from, well, every useful data source they can find.

GDP data is reported quarterly.  The first quarter of 2023 was January, February, and March.  After the end of each quarter, three estimates are released. Successive estimates reflect additional data that has become available since the previous estimate.  Here’s the Bureau of Economic Analysis describing the sequence of GDP estimates.BEA estimates the nation’s GDP for each year and each quarter. But new GDP statistics are released every month. Why? Because for each quarter, BEA estimates GDP three times. The advance estimate, coming about a month after the quarter’s end, is an early look based on the best information available at that time. The second estimate and third estimate each incorporate additional source data that weren’t available the month before, improving accuracy.

Now Back to the Data

The biggest surprise: a large chunk of the higher growth was consumer spending on healthcare. This has several implications. First, there was deferred healthcare consumption during the COVID episode. Personally, I’m getting around to several non-life-threatening issues that I’d been putting off. Apparently, I am not alone.

The second implication is how this contributes to household well-being. Health care is a relatively involuntary expenditure. If our health was perfect, the optimal amount of healthcare spending would be $0.00. It’s safe to assume that households would rather spend their limited incomes on something fun rather than healthcare.

The rest of this article delves into the numbers. As always, my methodology is transparent. Click here to download my Excel workbook. The first five worksheets are where the action is.

Number Crunching

Let’s start with healthcare. Household consumption expenditures on services contributed 1.44 percentage points to growth in the third estimate. This was 0.41 percentage points higher than the advance estimate. Of that 1.44 points, household spending on services contributed 1.61 points. That was partly offset by a reduction of 0.17 points in “final consumption expenditures of nonprofit institutions.” 1.61 – 0.17 = 1.44.

Of those 1.61 percentage points health care contributed fully 1.03 points. That’s the big kicker to the overall 2.79 point contribution of personal consumption expenditures.

In the advance estimate, gross private domestic investment deducted 2.34 percentage points from GDP growth. In the third estimate, that number rose (arithmetically) to a deduction of 2.22 points. (Reminder: -2.22 > -2.34.) That contributed +0.12 percentage points to the difference between the two estimates. I’ll just add that negative growth in investment is a very bad leading indicator.

Net exports are interesting. The net increased from 0.11 to 0.58 percentage points, a whopping 0.47 increase between the two estimates. Even stranger, the contribution of both exports and imports rose. Imports rose from -0.43 to -0.28 points (see earlier note on comparing negative numbers). Exports rose from 0.54 to 0.86 points. If you’re looking for numbers that may have been, um, adjusted, these are suspect.

Exports and Imports

Measuring exports and imports is always tricky. There are many factors affecting international trade. One is the exchange rate. If the dollar appreciates vis-à-vis, say, the Euro, U.S. exports to Europe will rise in price. We expect U.S. exports to fall. And U.S. imports from Europe will have lower prices. Imports should rise. Imports and exports change in opposite directions.

[July 12 update below]

On Twitter, @DividendMaster pointed to the depreciation of the dollar as a contributing factor. Over at Marketwatch, Frances Yue writes,

Fed fund futures traders are still pricing in an over 90% chance that the Fed will raise its benchmark interest rate by 25 basis points in its meeting later this month, according to CME Fed Watch. They are pricing in a 21.9% likelihood that the U.S. central bank will raise interest rates for one more time after July. That is down from 32.4% a day ago.

The Fed’s policy rate currently sits in a range of 5%-5.25%, its highest since 2007.

Meanwhile, the dollar typically trades according to expectations for U.S. rates relative to the rest of the world. While the Fed is seen as closer to completing its most aggressive rate-hike campaign of the past four decades, policy makers in Europe and the U.K. are possibly set up to boost borrowing costs further.

This “draws capital away from the dollar towards currencies where rates are still expected to move higher,” said Stephen Kolano, managing director of investments at Massachusetts-based Integrated Partners.

Marketwatch gives us this helpful graph.

DXY Revisiting First Quarter GDP

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The DXY is an index of the dollar exchange rate against a basket of foreign currencies.  It’s set up so that a decrease in the DXY implies a depreciation of the dollar.  On September 26, 2022 that index was 114.10.  Today it’s 100.54.  That’s about a 14% depreciation of the dollar.  As predicted, exports rose. Imports should fall. But they rose. Something else is going on.

What about income? If U.S. income increases faster than Euro-zone income, we expect the U.S. to buy relatively more imports from the Eurozone and Europe will buy relatively fewer U.S. exports. Again, imports and exports change in opposite directions.

But imports and exports changed in the same direction. Suspicious.

The Data

Here are the GDP comparisons, the breakdown of consumer spending on services, and a graph showing the magnitudes of the contributions from the advance estimate and the third estimate as well as the differential contribution. You’ll be better off downloading the Excel workbook and expanding the graph. A lot.

Comparison table Revisiting First Quarter GDP

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Services detail Revisiting First Quarter GDP

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Advance vs third est graph Revisiting First Quarter GDP

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Conclusion

I was expecting more evidence of fudging the numbers. The first place I always look is the intellectual property component of investment. Nothing wrong there. Second is the change in inventories. Measuring this is always problematic. But, again, there’s not much in the numbers. But fudging net exports is something I never expected. Congratulations to the Biden administration may be in order for finding a new way to alter the data.

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.