Data Dissection

February 28th, 2017 9:19 am | by John Jansen |

Via Stephen Stanley at Amherst Pierpont Securities:

Real GDP in Q4 was slightly weaker than expected, coming in unrevised at 1.9%.  The shortfall relative to my expectations reflects the old saying “a few billion here and a few billion there, and pretty soon it adds up to real money.”  There were not any big surprises, but a handful of categories came in a few billion dollars lower than I had anticipated.  Business spending on equipment, intellectual property, state and local government outlays, and inventories were all a little lower than expected.  Meanwhile, the main category that was revised higher was consumer spending, which was boosted from a 2.5% growth rate to a 3.0% annualized rise, in line with the robust average recorded since the beginning of 2014.

There are a few other details within the GDP report to discuss.  First, the core PCE deflator was revised downward from a 1.3% annualized increase to 1.2%, but this is even less than meets the eye.  The 1.3% reading before was actually 1.253% unrounded, and the new reading is 1.22%, so the revision is worth even less than full tenth (and will probably be worth a mere 2 BPs on the year-over-year calculation for December).  The January reading due tomorrow for the core PCE deflator will probably increase by 0.3% on a monthly basis, but the January 2016 reading was also up 0.3%, so the year-over-year advance may hold steady at 1.7%.  Meanwhile, the downward revision to the headline PCE deflator in Q4 was more substantial, from a 2.2% annualized clip to 1.9%.  As a result, the year-over-year advance through December is probably about 15 BPs lower than before.  This means that, while the surge in prices for January that will likely be reported tomorrow will still push the year-over-year increase up by around 0.4 percentage points, we are no longer going to hit the 2.0% mark in January.  More likely, the January year-over-year increase will jump to 1.8%.  I still think we get to 2% by spring, but the urgency may be slightly lower than I had anticipated heading into the March FOMC meeting.

The other key detail from today’s report is the incorporation of benchmark employment data into the wage and salary figures for Q3.  The revisions were upward but small for both Q3 and Q4, about $10 billion and $1 billion respectively.

Switching gears, the January merchandise trade deficit exploded upward by about $5 billion to $69.2 billion, about $2½ billion worse than I had expected (and over $3 billion worse than the consensus).  Imports surged, reflecting a big bounceback in auto imports and a surge in consumer goods imports.  The latter may reflect, at least in part, the timing of Chinese New Year, so it will be important to keep a close watch on these data for February as well.  In any case, based on the downside surprise, I am trimming my Q1 real GDP growth estimate to 1.8%.  While economic data have generally been quite strong of late, the key contributors to GDP that we have so far for January have been mostly soft.  I will not be surprised to see Q1 once again come in below the trend as well as recording the worst growth reading for the year.

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