Thursday, August 16, 2012

2Q 2012 National Accounts: Surprise, Surprise

What a nice lead up to the holidays. While I thought 2Q GDP might turn out to be pretty good, 5.4% annual growth is outside all my expectations (log annual and seasonally adjusted annualised quarterly changes; 2005=100)


Seasonally adjusted quarterly growth has been pretty solid too at 5.9%, holding up above 5.7% for three straight quarters.

Where’s it coming from isn’t terribly shocking though: (log annual changes; 2005=100):


The only demand side component really turning up is investment, though nearly every component showed growth. In fact, growth could have been twice as fast because the increase in investment and consumption combined were nearly twice as large as the increase in GDP.

One consequence of higher demand in a full employment economy is happening right before our eyes – you’re either going to get inflation, or you’re going to get higher imports. Either way, some of the impact of higher spending will “leak”. In this case, higher consumption and investment is pulling in imports, such that the price-adjusted trade balance is at its lowest level for a decade.

In case anyone’s interested, about two-thirds of investment is private sector and about a third public, while in terms of components somewhat more than half is incremental investment in structures and most of the rest in machinery and equipment.

On the supply side, the obvious beneficiary has been construction (log annual changes; 2005=100):


However…in terms of actual contribution to growth, the construction sector’s miniscule. The actual drivers of growth are services (about half) and manufacturing (another quarter). Services growth was fairly broad-based i.e. its not just government, though government services top the list. Number two is retail trade, and third is real estate and business services.

For the coming quarter, I’m continuing to remain a bit pessimistic. Let me explain:

Now that my job does in fact entail my actually coming up with semi-reasonable forecasts of major economic data series, I’ve been evaluating a number of methods to achieve that goal.

In this instance, with the exception of the IPI, every indicator I track said growth in 2Q2012 would be above 5%. I didn’t quite believe that because they said pretty much the same thing for 1Q2012, and the initial number came in at 4.7%. The revision to 1Q to 4.9% makes me feel better, but the fact that the 2Q number hit 5.4% does not, because it’s still below my weighted average forecast (between 5.6%-6.1%).

So for 3Q 2012, my gut feeling and the majority of the forecast equations are saying 5.3% (weighted average forecast of 5.8% less the average error for 2Q of –0.5%). We’ll see how that turns out.

Technical Notes:

2Q 2012 National Product and Expenditure Accounts from the Department of Statistics

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