US GDP growth – not as weak as it seems

The headline is that US GDP growth in the first quarter of 2015 slowed to a 0.2% annualized rate down from the 2.2% rate in the December quarter. I believe that this hides the real growth in the economy. To be sure non residential investment would have fallen (thanks in large part due to oil related investments), but real incomes and consumption actually benefited from the fall in inflation. See also FT Alphaville – Another Winter of Discontent (registration required).

The problem with looking at quarter on quarter data is that we are dependent on the seasonal adjustment factor used. Using a year/year measure removes this “adjustment” but has issues with being dated, i.e. not representing current growth. Nevertheless when we look at the year-on-year numbers, the growth in Q1 was 3.0% compared to 2.4% y/y growth in December. In fact Q1 2015 has been one of the fastest growing quarters post-recession as shown in the chart:

US GDP Reported

Note the big divergence between the quarterly and annual rates of growth. Sharp eyed readers will note that the quarterly numbers for the March quarter in previous years too seem depressed (notably in 2014 and 2011). This should not be the case if we use seasonally adjusted numbers. The point of using seasonal adjustment is that this sort of seasonality is removed. Looking at the post recession period (2010 onwards), we see an interesting trend in the average for each quarter:

US GDP Average Quarterly

Consistently the Q1 number is low, while the variation in other quarters is limited. Note that the variation in y/y numbers is also small. Clearly there is a problem with the seasonal adjustment methodology used by the US commerce department. So I did a quick readjustment and calculated my own seasonally adjusted GDP series using the data in the post recession period and this is how it looks:

US GDP Revised

The number for Q1 2015 is a growth rate of 2.0%, and the y/y rate is (no change here) 3.0%. This is certainly a slowdown relative to the 4% growth that was seen in June and Sept 2014. The slowdown in December and March quarters in this series are also consistent with the strength in dollar leading to weak net export performance.

And the average growth rates for each quarter now:

US GDP Average Revised

The Q1 anomaly has disappeared in the new series as it should.

Bottom line:

Growth in the US is slower than before but a 2% growth rate is pretty decent. The Fed is right in dismissing the weak GDP print, but for the wrong reason. It is not transitory factors, but rather the seasonal adjustment methodology. By the time Q2 numbers roll out, we could be in for an upside surprise in growth. Note that the GDP series is also due for revision in July. Perhaps we may see some recalculation of the Q1 numbers.

 

Big disclaimer: This is just a rough and ready calculation. Please do not use this to make investment decisions. Also note this is a personal blog and a personal view. This does not necessarily represent the view of my employer.

 

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