What Does the GDP’s Downward Revision Signify?
Last week’s GDP report from the Bureau of Economic Analysis revised the estimate for Q1 growth sharply downward, from 2.4 percent to 1.8 percent. As the following chart shows, the revision makes the rebound from the slowdown at the end of last year look less robust.
The early estimates for each quarter are based on incomplete data supplemented by extrapolations from historical trends, and revisions are common. The revision announced last week was larger than usual, however. The average revision (without regard for sign) is 0.2 percentage points from the second estimate to the third. This time it was 0.6 points. The change from April’s advance estimate of 2.5 percent was even larger. How can we explain it?
One way is to look at the contributions to GDP growth of each sector of the economy. The following table compares the data from the advance estimate to those of the third estimate. It shows that the downward revision affected every part of the economy. Growth of consumer spending, which almost always makes the largest single contribution, was revised downward from 2.24 percentage points to 1.83 percentage points.
The contribution from investment growth fell from 1.56 points to .96 points, with decreases in both fixed and inventory investment. Shrinkage of the government sector, which has had a negative impact on growth throughout the recovery, was more rapid than previously reported. Every sector of government — federal defense and nondefense, state and local — made a negative contribution to growth in Q1.
Net exports made a smaller negative contribution to growth than previously reported, -.09 percentage points rather than -0.5 points, but when we look at the details, we cannot really call that good news. One disappointing development was a revision of export growth from positive to negative. As the next chart shows, that meant that exports fell in Q1 for the second consecutive quarter. Up to Q4 2012, exports had been one of the strongest drivers of the recovery. The slowdown in exports is largely due to weaknesses in almost all major U.S. trading partners.
Furthermore, the contribution of imports to GDP growth turned from negative to positive in Q1. That, too, is not entirely good news, when we consider that imports are entered into the national accounts with a negative sign. A positive number in the reported contribution to growth thus means that imports were decreasing, reflecting the general weakness of demand both for imported consumer goods and imported capital goods.
The less impressive growth report for Q1 2012 throws new uncertainty into the Fed’s recent hints that it will begin to taper off its program of large-scale security purchases later this year. That prospect was based, in part, on relatively good job market performance since January. However, weak GDP growth suggests that improvement of the labor market might not continue. Much will depend on next month’s job market data and at the advance estimate for Q2 GDP, both of which will be available by the time of the Fed’s next policy meeting, scheduled for the end of July. If those data are weak, the Fed is likely to put its planned tapering on hold.
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