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Brent Meyer |

Economist

Brent Meyer

Brent Meyer is a former economist of the Federal Reserve Bank of Cleveland.

06.03.08

Economic Trends

Real GDP First-Quarter 2008 Preliminary Estimate

Brent Meyer

Real (inflation-adjusted) GDP increased at an annualized rate of 0.9 percent in the first quarter, according to the preliminary estimate from the Bureau of Economic Analysis (BEA), up 0.3 percentage point from the advance estimate. The magnitude of this revision is consistent with the long-term trend for revisions from the advance to preliminary release: From 1983 to 2004, the average revision has been 0.2 percentage point (the absolute average was 0.5 percentage point and the standard deviation was 0.4 percentage point). The latest revision was primarily due to upward adjustments to nondurable consumer spending, nonresidential fixed investment, and net exports, which were tempered by downward corrections to private inventory investment and consumer spending on services. Nondurable consumer spending was revised up from −1.3 percent to −0.3 percent in the first quarter, while 0.4 percentage point were trimmed off consumer spending on services, negating any effect on overall consumption. Nonresidential investment in structures was adjusted up from −6.2 percent to 1.1 percent. While export growth was revised down from 5.5 percent to 2.8 percent in the first quarter, import growth fell further, from of 2.5 percent to −2.6 percent.

An investigation into each component’s contribution to the percent change in real GDP yields some interesting results. Most notably, a downward revision to private inventories—from an accumulation of $20.1 billion to just $3.9 billion—subtracted 0.6 percentage point from growth. The advanced estimate for the first quarter had private inventories adding 0.8 percentage point to growth, keeping GDP out of the red. Changes in private inventories can have muddling effects on the interpretation of GDP, which is why it may be useful to look at final sales of GDP.

The final-sales-of-real-GDP statistic is basically real GDP excluding inventories. It gives us a clearer picture of demand by adding together consumer, business, and government spending. It also may provide an early warning sign of turning points in the economy. The story is that if final sales growth is less than overall GDP growth (for some period of time), inventories will begin to accumulate and that will cause businesses to slow or halt production. This results in an impending slowdown or recession. According to the advance estimate, final sales of real GDP for the first quarter dipped below zero for the first time since the fourth quarter of 2005, falling 0.2 percent (at an annualized rate). However, after the first revision, final sales grew 0.7 percent in the first quarter, taking some wind out of the recession argument (for the moment). On a year-over-year basis, final sales of real GDP ticked down from 2.8 percent last quarter, to 2.7 percent currently.

The Blue Chip consensus economic forecast is predicting that the economy will grow a shade above zero next quarter, before snapping back in the third quarter and rising to near trend growth by the end of 2009. Of the 50 forecasters surveyed, nearly half revised up their 2008 GDP forecast from the April survey. On the other hand, 30 forecasters revised their 2009 GDP outlook down.