The first estimate of GDP for the second quarter of 2014 came roaring in at 4% annualized growth. The following is an initial analysis as written by Neil Irwin from the NYT:
“First, here’s the overall growth number. As it shows, the 4 percent rate of economic expansion in the April-through-June quarter was the strongest since last summer and the third-strongest quarter in the expansion that began five years ago.
But there is an important qualifier. Of the 4 percent reported growth, 1.66 percentage points was attributable to businesses increasing their inventories. But when companies make more goods that end up on store shelves or in warehouses (and not because they’re selling more stuff), that doesn’t tell us much about the future of the economy. So economists often look at ‘final sales,’ excluding inventory effects, to get a sense of the true underlying pace of growth.“
This is a good piece of analysis which provides a good starting point for discussing the current state of the economy. The latest release of data also included annual revisions. These revisions are almost always overlooked by analysts since they are“past history” but provide an interesting perspective on how far the estimates have been away from reality. The charts below show both the pre- and post-2014 revisions to the data to provide some context to the economic strength/weakness debate.
Real Final Sales
Neil is correct, real final sales can tell us much more about the state of the economy than just headline GDP. In the latest quarter, final sales of domestic product rebounded 2.3 percent after dipping 1.0 percent in the first quarter. However, as shown below, real final sales on an annual basis actually declined near levels that are normally associated with recessionary drags in the economy.
As shown, real final sales were weaker than originally forecast in 2012, however, 2013 was revised up to stronger sales. Importantly, the decline in real final sales in the Q4 of 2013 and Q1 of 2014 has been substantially worse than originally thought. This sharp decline in real final sales is a primary contributor to the build in inventories. Companies have been producing products, which has boosted production numbers, but consumption has been weak.
