What That GDP Revise Really Means
U.S. stocks were up this morning despite some surprising and sizable downward revisions in the U.S. Bureau of Economic Analysis's final first-quarter estimate of gross domestic product. Most bond yields, which have risen relentlessly since May, are down by a few basis points as well.
The new information is about stuff that happened months ago, so it makes some sense that the markets have been relatively sanguine. On the one hand, the economy is somewhat weaker than people had previously hoped. On the other, that persistent weakness will probably make the Federal Reserve reluctant to "taper" its asset purchases prematurely -- much less raise short-term interest rates.
The BEA now thinks that the U.S. economy expanded at an annualized rate of just 1.8 percent in the year's first three months. Personal consumption took the biggest hit, but exports, imports and nonresidential investment were also revised downwards. (On the bright side, the collapse in the personal savings rate wasn't quite as severe as previously thought.)
These revisions confirm a recent pattern over the past several years in which commentators (and the Federal Reserve) got overly excited about an accelerating recovery only to find that the economy was still chugging along at the same old (slow) pace. For context, remember that forecasters were originally expecting the economy to grow at an annualized rate of 3 percent in the first three months of the year. The initial estimate from the BEA was 2.5 percent, which was subsequently revised to 2.4 percent. While the latest news is hardly evidence of an imminent recession, it does suggest that the hefty tax increases imposed at the beginning of the year had more of an impact than previously believed.
(The federal government spending cuts associated with "sequestration" began in the middle of March, so their impact won't really be felt until the second quarter. We'll get the initial estimate of the Q2 numbers on July 31, along with a comprehensive revision of all previous GDP data using the BEA's new methodology.)
The quarter-to-quarter variation is often noisy, so I personally prefer looking at the annual changes. From that perspective, we see that the U.S. economy has been slowly chugging along within the narrow range of 1.6 percent to 2.8 percent ever since the beginning of 2010. Forecasters surveyed by Bloomberg seem to think we will be trapped in this range for a while. According to them, the economy will expand by 1.9 percent in 2013 and by 2.7 percent in 2014. This explains why even the optimists think that we won't return to full employment until more than 10 years since the start of the crisis.
The latest information on international trade is both interesting and potentially troubling. First, exports have effectively stopped growing. This is almost certainly due to the continued weakness of our major trading partners. Rather more remarkably, spending on imports has actually declined. Some of this is due to the rise of domestically produced energy and the more broad-based decline in commodity prices. Those forces, however, cannot explain the deceleration of spending on services imports to the slowest pace in three years. This could be relatively benign but it could also indicate flagging consumer demand.
Research from a few regional Fed banks adds some interesting color to what we can expect in the near future. A survey of business conditions run by the Atlanta Fed suggests that business conditions have gotten a lot closer to "normal" over the past three months. The data don't go back very far, but it could explain why the Fed has been relatively sanguine about the increase in real interest rates over the past few months.
Meanwhile, a new note from the Federal Reserve Bank of Cleveland points out that increases in household wealth aren't being spent at the same rate as in the years before 2007. This accords with recent research into the changing nature "wealth effect" by University of Chicago economist Amir Sufi, which I've written about previously. Unlike Sufi, however, the economists at the Cleveland Fed emphasize the heightened caution of U.S. households rather than the changing distribution of asset ownership.
Finally, the Federal Reserve Bank of New York points out that the rate of employment growth has been remarkably uniform across the 50 states since the trough of the recession. That's actually very odd, because the distribution of employment losses was very uneven. States with the biggest housing bubbles generally lost many more jobs during the downturn than those states without bubbles. (Differences in population growth also affect the numbers.) Compared to the recovery from the recession of the early 1990s, there is much less variation among the performance of the 50 states. This suggests that the macro picture is much more important at explaining the pace of employment growth than the differences in local policies at the state level.
Tomorrow the BEA will release its latest estimate for personal income growth in May. That will probably give us -- and the markets -- more useful information about whether the Fed will be ready to lift its foot from the gas pedal.
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