Beyond Better GDP Growth, Reasons For Concern

This morning, the Bureau of Economic Analysis released the revised estimate of the gross domestic product, the broadest measure of economy’s output, for the fourth quarter of 2015. According to the revised data, GDP rose 1 percent (annual rate) in the fourth quarter of 2015, somewhat faster than the 0.7 percent rate indicated by the initial estimate of a month ago.

The revised estimates are based on more complete data than were available at the time of the initial estimate. Further revisions will happen next month, when even more complete data become available.

The upward revision of GDP growth may appear to indicate somewhat better economic conditions at the end of last year than were originally thought. But even with the improved GDP growth, there are worrying signs in the numbers.

The GDP growth was revised upwards primarily for two reasons — because business inventories increased more than were originally supposed, and because imports posted a decline instead of the increase reported in the earlier estimates. Both changes point to a weaker growth in domestic demand than originally believed.

Inventories count toward GDP because they represent a part of production taking place in the economy – goods that were produced but not yet sold. GDP aims to measure the total value of goods and services produced by the domestic economy in a given period. Imports are subtracted from GDP because they represent products that were produced by other countries (not the domestic economy), and thus a decline in imports boosts GDP growth.

However, both the rise of inventories and a decline in imports suggest that U.S. consumers and businesses purchased fewer goods and services than we thought. And the slower overall demand can be a reason to worry, if it persists.

Still, the change in inventories and imports represent only a small part of the overall output of the economy. Together they account for about 20 percent of the output growth in the fourth quarter of 2015. The main driver of growth continues to be the personal consumption expenditure, which rose at 2 percent (annual rate) according to the updated estimates, a bit below the earlier estimate of 2.2 percent. If reasonably robust growth in consumer demand persists, the overall GDP growth will also pick up.