Thursday, August 7, 2014

GDP UPDATE: Rebound in Q2

Tyson Smith, Regional Economist

In a blog post last month, I dug into the implications of the decline in first-quarter Gross Domestic Product (GDP).

The article suggested that readers should not panic over the single quarter drop of 2.9 percent, while at the same time it cautioned that the significant drop should not be dismissed. The argument is that changes in quarterly GDP are erratic and prone to large variations from the initial estimate to the second (and final) quarterly revision. However, quarterly GDP declines of 2 percent or larger are somewhat rare, and in the past have been correlated with recessionary trends.

Ultimately, the article pointed to extreme weather and positive economic data in several other areas – most notably the labor market – as reasons for optimism that GDP would rebound. 

Last week’s GDP press release seems to support the notion that the first quarter drop in GDP was an anomaly, and not a trend. Second-quarter GDP estimates rebounded strongly, showing 4 percent growth from the previous period (seasonally adjusted). And the final revision of the first-quarter GDP data revealed an upward revision to negative 2.1 percent.

Both the initial second-quarter estimate and the revision of the first-quarter estimate represent positive news for the health of the national economy. And given that Utah’s GDP normally grows faster than the national average this news is likely amplified locally. However, the same caveats that were applied to the negative news of the first quarter also apply to last week’s positive data.

For one, the initial estimates undergo two rounds of revisions that often yield dramatic adjustments to the data. It is highly unlikely that second-quarter GDP growth will remain at 4 percent after two rounds of corrections. Recent history shows us that it is almost a 50/50 bet as to whether the final revision will be above or below the previous estimate.

Secondly, the burst of economic activity in the second quarter may have been a reaction to the poor weather of the first quarter, and not a sustainable trend over the long term. In other words, consumers may have delayed their consumption for a few months, and the pent up demand resulted in a flurry of transactions once the weather improved.

Finally, while there continue to be positive economic indicators pointing toward future growth, expansion in some vital sectors has started to wane. The housing sector in particular has experienced a bit of stagnation to start 2014. Many economists thought that the housing market gains that started in 2012 and escalated in early 2013 pointed to a strong recovery in 2014, but so far this has not been the case. Recent housing construction, sales and price data have been disappointing (even though, in some cases, these data continue to move in a positive direction).

It is still possible that the drop in first-quarter GDP is an indication that the national economy is weakening. But, the data released last week increases the likelihood that it was an anomalous event that will not hurt growth going forward. Economists remain cautiously optimistic that the country will finish the year with moderately-strong GDP growth.

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