Friday, October 31, 2008

GDP Breakdown... Not "Better" than Expected

At first glance, the GDP figure was outright ugly. The U.S. consumer simply gave up in the quarter. Without the government's massive spending and contribution from net exports, it would have been horrific. Unfortunately, there was even more to the number than I first gathered and the horrific term rings true (Note, for those that need a better grasp of the GDP Deflator before they dive in, go here.)

In Q3, imported goods contributed -1.6% to the GDP Deflator (down from -4.6% in Q2).

As we'll explain, this -1.6% figure is too negative, which means the GDP Deflator is too small. Since the GDP Deflator is the rate required to convert nominal GDP to real GDP, this means the -0.3% GDP figure for Q3 is too high. Lets take a look at petroleum imports (and its impact on GDP in Q3) to see why.

Petroleum imports contributed to roughly 1/4 of the reduction in overall imported goods for the quarter (-0.65% of the -2.43% change - Table 4.2.2). Importing less goods in Q3 contributed a positive 0.45% to GDP, thus the ~1/4 contribution of petroleum imports equates to 0.12% of that growth (Table 1.1.2).

This is based on a -3.3% real change in petroleum imports (Table 4.2.1). HOWEVER, this is the case only if we believe the price of petroleum imports INCREASED 8.4% in the quarter (Table 4.24).

The problem is THE PRICE OF PETROLEUM DECREASED CONSIDERABLY IN ANY MEASURE during the third quarter. Crude prices decreased ~30% in the quarter (end of month June to end of month September) or more accurately for this analysis decreased ~5% using the average price in Q2 vs. the average price of Q3. Below is a chart of the change in the index level for petroleum (as reported by the BEA) vs. the change in the average market price for the past three quarters.

Assuming there was no change in the price of petroleum, rather than a decrease (to be conservative), the reported 3.3% decline in imported units of petroleum becomes a 5% increase. This coincides with the recent reports that miles driven by Americans have rebounded from June lows. This small calculation change turns the 0.12% positive contribution to GDP into a negative 0.18% detraction (or a 0.30% total change to the downside). This would move the GDP figure from -0.30% and "better" than forecast to -0.60% and worse than forecast.

This is just one area I specifically targeted, as I was looking for a reversal from some insanely large GDP Deflator contributions from petroleum in Q2. Who knows what else is in there. What I do know is consumption makes up ~70% of GDP and consumption was down a whopping 3.1%. That is certainly not "better" than I was forecasting...