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Friday, September 29, 2023
HomeNewsEconomyFed Pushes for New Method After Final 1Q GDP Contracted by 0.2%

Fed Pushes for New Method After Final 1Q GDP Contracted by 0.2%


File photo: Shipping-cranes-in move containers at a port in Portland, Oregon. (Photo: REUTERS)

The U.S. economy contracted in the first quarter by less than initially anticipated as trade deficits ballooned and consumer spending fell. The Commerce Department said on Wednesday gross domestic product fell at a 0.2 percent annual rate in the first quarter, up from the 0.7 percent pace of contraction initially reported last month.

While a higher pace of consumer spending than previously estimated accounted for much of the upward revision, the ballooning trade deficit was went unrevised. Exports were revised up, but that adjustment was offset by an upward revision to imports, leaving an enormous trade deficit that sliced nearly 2 percentage points from 1Q GDP.

Consumer spending, which accounts for more than two thirds of U.S. economic activity, was revised up to 2.1 percent growth pace from the 1.8 percent rate reported last month.

Still, with personal savings at a $720.2 billion pace, consumer spending could either pick up in the second quarter or Americans could send the economy a signal by holding their money at a higher rate than the historical average.

Now, elements in the Federal Reserve are pushing to make yet another adjustment to the methodology for calculating GDP in the wake of the Commerce Department report. Naturally, these “adjustments” will boost GDP measurements.

The revision would mark the second time the government has changed the previously long-standing methodology. In July 2013, the U.S. government made a significant change in the gross investment number (I), which now includes research and development (R&D) spending, art, music, film royalties, books and theatre. In the entertainment industry, for instance, much of those numbers are expected projections, such as how much they believe a movie will make at the Box Office.

This change in the method to gauge GDP — or, rewriting the GDP number — was first implemented by the United States, and India was quick to express an interest.

Yet, those at the San Francisco Federal Reserve Bank say the problem with the model the government currently uses to adjust the data for seasonal fluctuations also contributes to depressing the GDP number. They argued the so-called seasonal adjustment is leaving “residual” seasonality.

So, get ready to be fooled, and not by the contraction apologists who scapegoat bad weather, a “strong dollar, spending cuts in the energy sector and disruptions at West Coast ports.” The government said last month it was aware of the potential problem and was working to address it when in publishes annual GDP revisions in July.

When measured with their new method, the economy expanded at a rate closer to the income measurement of a 1.9 percent pace in the first quarter, up from the 1.4 percent previously reported. A measure of domestic demand growth was revised up four-tenths of a percentage point to a 1.2 percent rate.

There are mixed signs for second quarter growth even if the government wasn’t getting ready to play with the numbers.

Retail sales in May were stronger-than-expected and helped to stave off recession fears. The housing market saw data from the National Association of Realtors that showed a 5 1/2-year high pickup in existing home sales, which was heralded by traditional media, but the National Mortgage Risk Index hit a series high last month. For the first time since tracking began, the number of new, high-risk mortgages in the housing market last month outnumbered the low-risk share.

Businesses inventories were more than previously estimated in the first quarter, which means they have little incentive to keep on adding to it in the second quarter. That translates into worse news for an already-weak manufacturing sector nationwide. The value of inventory accumulated in the first quarter was revised up by Commerce to show a gain of $99.5 billion from the $95 billion rise reported last month, which means inventories contributed 0.45 percentage point to GDP instead of the previously reported 0.33 percentage point.

Inventories are likely to be a drag on second-quarter GDP.

Further, after-tax corporate profits were slightly weaker in the first quarter than previously thought. In fact, after-tax profits — along with inventory valuation and capital consumption adjustments — were revised to reflect a 8.8 percent decline.

Written by
Staff Writing Group

PPD Business, the economy-reporting arm of People's Pundit Daily, is "making sense of current events." We are a no-holds barred, news reporting pundit of, by, and for the people.

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