August 9, 2016
Who Are You Going to Believe -- the
Commerce Dept. or ISM, Autodata & the BLS?
This past July 29, the Commerce Department surprised the
economic cognoscenti by reporting that its advance estimate of second quarter
real GDP annualized growth was a paltry 1.2%. The consensus estimate of Street
economists was north of 2%. Oh my, with growth this anemic, the Fed certainly
would not entertain raising its policy interest rates at its upcoming September
20-21 meeting, would it? Yes, it might. And here’s why.
Firstly, the advance estimate of GDP is called that
because it is made in advance of the
Commerce Department having all of the data that goes into the GDP calculation.
For example, Commerce does not have complete inventory, trade and construction
data. So Commerce makes educated guesses as to what the missing data might turn
out to be. Moreover, some of the “hard” data Commerce has is actually “soft”
and will be revised in the coming months. As previously incomplete data are
available and revisions to previously available data are made, Commerce
releases a revised estimate of GDP a month after the release of its advance
estimate. And then a “final” estimate of GDP is released by Commerce a month
following the release of the revised estimate. But the final estimate is not
really final inasmuch as Commerce keeps revising a given quarter’s GDP years after
the release of the not-so-final estimate. To illustrate this revision process,
I pulled out of the air (thin air? drink) estimates of the annualized change in
real GDP for the first quarter of 2014. The advance estimate was 0.1%. Two
months later, the “final” estimate was minus
2.9%. As of July 29, 2016, the estimate of the annualized change in Q1:2014
real GDP was minus 1.2%. So you can see that there is many slip twixt the cup
and the lip when it comes to advance estimates of GDP and later estimates.
Secondly, even if we made the heroic assumption that the
advance estimate of Q2:2016 real GDP growth at 1.2% were close to being
accurate, it understates underlying demand for U.S. goods and services. If the
guessed-at inventories component of GDP are stripped out, real final demand for
U.S. produced goods and services grew at an annualized 2.4%. This compares with
annualized growth in real final demand of 1.2% and 1.3% in Q4:2015 and Q1:2016,
respectively. So, if the Fed were inclined to believe the advance national
income and product data for Q2:2016, then it might be impressed by the
acceleration in real final demand growth.
To get a fix on the current performance of the U.S.
economy, I prefer to look at some indicators that have been reliable in the
past, are more timely than Commerce Department GDP estimates and do not get revised nearly as much as GDP. Those
indicators are the ISM new orders index, monthly new car/truck sales and
monthly number of unemployment insurance recipients. The last 12-month behavior
of these indicators is shown in Charts 1, 2 and 3.
Chart 1
Chart 2
Chart 3
Chart 1 shows the monthly levels of the weighted-average
index of new orders for manufacturing and nonmanufacturing businesses surveyed
by the Institute for Supply Managers. The weights are derived from the
value-added data of manufacturing and nonmanufacturing firms contained in the
national income and product accounts. After dipping in May, business new orders
picked up in June and July. Chart 2 shows that car and truck sales accelerated
to an annualized pace of 17.9 million units in July after braking in June.
Chart 3 shows that the number of people receiving unemployment insurance has
been trending lower since blipping up in May. Except for new seasonal
adjustment factors and/or changes in the relative value added of manufacturing
and nonmanufacturing firms, the ISM new orders data will not be revised. Except for new seasonal adjustment factors, the
car and truck sales data will not be revised. The unemployment insurance data
will be lightly revised in the next four weeks, but that’s it.
These three indicators show that the U.S. economy was doing
just fine last month. They could reverse course between now and September
20-21. But given strong growth in bank credit, I doubt they will. Don’t count out a policy interest rate
increase at the upcoming September FOMC meeting.
Paul L. Kasriel
Senior Economic and Investment Advisor
Legacy Private Trust Company of Neenah, WI
Founder, Econtrarian, LLC
1-920-818-0236
