The Trouble of Q1 GDP Being Revised Higher

Economy

Published: June 24, 2015 10:05 am

The second, and supposedly final, revision to first-quarter gross domestic product (GDP) came in at -0.2%. This met the Bloomberg consensus estimate of -0.2%, and it was slightly better than the -0.7% prior revision. The PCE price index was unchanged in the quarter.

What investors need to consider here is that this GDP report is just a retooled and reworked report that covered the period of January 1 to March 31. Quite simply, it is now extremely old data. This included negative trends from weather, with business spending and lower personal consumption expenditures, and the strong dollar has its graffiti written all over this report.

Exports were in the red, a tell-tale sign that the strong dollar has been a negative drag on demand from overseas for goods sold in U.S. dollars. The other side of the strong dollar was a rise in imports, also a drag on GDP.

The highest gain came in restaurant spending and spending for other services. Higher inventories were seen as well, with a blame on severe weather. Another positive was seen in residential investment.

Another consideration here is the debate over the validity and seasonality impact of the first-quarter calculations on GDP. Also, the first quarter of 2014 saw its GDP in the red at -2.1%, and it was followed by a 4.6% snap-back gain in second quarter of 2014.

Estimates for second-quarter GDP were shown by Bloomberg to be between 2% and 3%. While this is not super strong at all, investors and economic watchers should consider that the big-ticket items seen in durable goods have been weak for two of the three months reported so far in the second quarter.

The first look at second-quarter GDP will be seen at the end of July. We will have gotten well into earnings season by then, and at least some of the currency pressure has been relieved during the second quarter of 2015.

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As a reminder, the higher the second-quarter GDP comes in, the more likely we are to see calls for the Federal Reserve to begin hiking interest rates sooner than expected. Now if the Fed can just find some of that inflation it keeps hoping for. The PCE component in GDP is not reflective of much inflation yet.

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