Wednesday, June 25, 2014

Two notes about Q1 GDP

 - by New Deal democrat

As an initial matter, as Business Week pointed out:
The big surprise in the first quarter was the dip in health-care spending. The U.S. spent $6.4 billion less on health care in the first quarter than in the last quarter of 2013. Government statisticians initially forecast a 9.9 percent increase in health-care spending—and what we got was a 1.4 percent decline. Considering all the millions of previously uninsured people who are gaining access to health insurance under the Affordable Care Act, how can they be shrinking so dramatically?

Health-care costs overall have been increasing more slowly in recent years compared with the pace before the 2007-09 recession. ....

[T]he Bureau of Economic Analysis ... [, t]o estimate the effect of Obamacare in the first quarter,... initially relied on trends in Medicaid spending, because it could not directly capture spending by people newly enrolled in private insurance.
In recent years, 15% of the entire US GDP has been spending on health care.  Reining in that spending has been something of a Holy Grail, and the Affordable Care Act a/k/a ObamaCare. was supposed to at least partially achieve that.  Since this was the first quarter that its effect had to be measured for GDP purposes, we are in terra incognita, and so was the BEA as indicated in the above quote.

So a deceleration or outright decline in health care costs is we have been trying to achieve, and over the long term that will have a negative effect on GDP.  That  being said, that money should show up as savings or spending elsewhere. 

The bottom line is, the big decline in health care spending may actually be a net good, at least over the longer term, but only  somebody with deep-in-the-reeds knowledge of health care spending is going to be able to figure that out.

But to my main point, one of the things I used to point out in late 2009 and 2010 was that YoY measures miss turning points. By the time a series is up/down YoY, the turning point could have been 3, 6, or 9 months ago.

For example, even after today's Q1 GDP revision, YoY GDP is still up 1.9%.

I mention this because most of my "Weekly Indicators" are tracked YoY.  There's no choice, because most have seasonality and aren't adjusted for that. So I always am on the lookout for substantial acceleration/deceleration.

At the worst point of Q1 in February, a number of the indicators were actually negative YoY.  Since mid-March, not only have they returned to being positive YoY, but some have had the best readings in about 3 or 4 years.  Below I am showing the negative reading from my "Big Chill""Weekly Indicators" column at the epicenter of the weakness in February, and comparing that with the readings last week (in parentheses):

Consumer spending
  • ICSC +0.3% w/w.  UNCHANGED YoY (+3.1%)
  • Gallup daily consumer spending 14 day average at $77 down -$3 YoY (-$6, but hit a 6 year high about 4 weeks ago)
Steel production from the American Iron and Steel Institute
  • -1.9% YoY  (+1.4%)
 Railroad transport from the AAR 
  • -4,100 carloads down -1.5% YoY (+2.2%)
  • -1,500 carloads down -0.9% ex-coal (+7.6%)
  • -2,000 or -0.8% intermodal units (+6.3%)
  • -6,200 or -1.2% YoY total loads (+6.1%)
Shipping transport
Housing metrics
Mortgage applications from the Mortgage Bankers Association:
  • YoY purchase applications down -17% (-15%)
Real estate loans, from the FRB H8 report:
  • -1.0% YoY (+0.9%)
Oil and Gas:
  • Usage 4 week average YoY down -1.6%  (+2.9%)
JoC ECRI Commodity prices
  • -0.48 YoY (+6.04)
Mortgage applications still stink, but virtually every other metric has completely turned around

Now here is a thought experiment:  what if Q2 YoY GDP reflects that same trend?  Here's a list of real GPP, in $trillions, beginning in Q1 2013, with the q/q change in parentheses after:

Q1 2013  $15.58 
Q2 2013  $15.68 
Q3 2013  $15.84 
Q4 2013  $15.94 
Q1 2013  $15.82

If Q2 is up only 2% YoY from Q2 2013, that will be $15.99, a +1.1% increase from today's Q1 number, or +4.4% q/q annualized.  If it were to return to the increasing trend line of +1.33% quarterly real growth from the prior 3 quarters of 2013 it had before Q1 2014, that would be $16.31, a +3.1% increase, or +12% q/q annualized!!! (not gonna happen, but worth pointing out).

By no means do I claim any expertise in calculating GDP, but if the strong YoY readings I have seen in the last couple of months in my weekly column show up in Q2 GDP, then I wonder if a +4% or even +5% Q2 GDP is in the cards.