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Political Disclosure Statement
I'm a registered Republican (by default) but consider
myself a conservative with a few libertarian leanings.
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Foreword
Years ago, I adopted the policy of occasionally apprising clients of my personal political leanings when writing about such matters. I try hard to keep my own feelings out of analytical work; I believe I generally succeed. Nevertheless, I also believe that people reading the work have a right to know what my political proclivities are.
The work at hand is the first installment of a short series involving some political considerations and conclusions. Thus, the disclosure statement. Today's installment and the ones that will follow were discussed in general terms in the 8/18 missive entitled, "The Election: Maybe It's the Economy After All?"
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Introduction
The title of this offering may sound a little melodramatic. However, there's a pretty solid chance that next Friday will see a write-down in the Commerce Department's estimate of second-quarter gross domestic product, a result initially reported at a not-so-hot 3%. Although the pending number relates to the quarter ended June, it could have an important influence on November's election -- an influence potentially good for the donkeys, less good for the elephants!
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Onward
NOTE: Many of the numbers mentioned below are contained in the table appearing at the conclusion of the text.
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On 7/30, the Commerce Department released its advance estimate of second-quarter gross domestic product, along with revisions to data going back to the first quarter of 2001. The prior revisions made some interesting changes in configuration, but they did not alter overall growth very much from the first quarter of 2001 through this year's first quarter, inclusive.
What did surprise many analysts (not me!) was the weakness exhibited in the Commerce Department's initial estimate of second-quarter 2004 growth. It came in at a rather paltry 3% annual rate, well below the consensus estimate. (For further details, refer to the missive dated 8/2, "Second-Quarter 2004 GDP [Advance Estimate]").
If 3% was disappointing, something less than 3% would be more so. I believe there's an excellent chance that the next estimate, due out a week from today, will be less than 3%. Before examining why this is, a look at a few release dates is in order.
Date Description
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07/30 GDP, adv. est., 2Q04
08/13 Trade, 6/2004, + 5/2004 revision
08/27 GDP, prelim. est., 2Q04
09/10 Trade, 7/2004, + 6/2004 revision
09/29 GDP, final est., 2Q2004
10/29 GDP, adv. est., 3Q04
11/02 National election
There are three items of particular importance about the above chronology: (1) Last week's reported $55.8 billion trade deficit for June will not be revised until 9/10, which means (2) next week's GDP release will contain the June results (or at least some of them), and (3) the first look at third-quarter GDP will not be out until only a few days before the election. In turn, this means that second-quarter GDP will be the key political number as it relates to this series.
Generally, the differences between preliminary and final GDP estimates for a given quarter are less significant than the differences between advance and preliminary estimates. This results from a lot of incomplete or missing data when the Commerce Department releases its advance estimate, data that are much more complete when its time to render the preliminary estimate.
For instance, when the advance estimate for the second quarter was released on 7/30, trade data for June had not been released. Therefore, it was estimated in the report. It is the huge spike in the June trade deficit (called "net exports" for GDP purposes), that I believe might account for a material decline in the revised GDP numbers that will be reported next week. And despite the fact the June trade deficit may be revised downward, that will not occur until 9/10, well after next week's GDP release.
To keep matters as simple as possible, six major categories make up gross domestic product. In the order they appear in the later table, these are: (1) inventory change, (2) personal consumption expenditures, (3) nonresidential fixed investment (capital spending), (4) residential fixed investment (housing), (5) net exports, and (6) government spending (combined federal and state-and-local spending).
The net of these six items flows through to GDP on a dollar-for-dollar basis, as a net increase or decrease to GDP.
Following are the six months of now-reported trade deficits for 2004 (in billions):
Second Quarter First Quarter
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Apr. $ 48.097 Jan. $ 45.176
May $ 46.882 Feb. $ 45.185
Jun. $ 55.815 Mar. $ 46.571
------- -------
Total $150.794 Total $136.932
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Remember, these are deficits, therefore, negative numbers for GDP purposes. In other words, they subtract from GDP. If they grow to larger negative numbers, they subtract more from GDP. Also, the above numbers are not annualized. To get them into GDP format, you must annualize them by multiplying by four. Thus, at an annual rate, the second-quarter figure becomes $603.2 billion, and the first-quarter figure becomes $547.7 billion.
I wish I could tell you that you simply take the above and it becomes the GDP "net export" component. It does not, for a variety of reasons. But sometimes, it does get close. For instance, in the first-quarter final GDP number, net exports were reported at minus $550.1 billion, versus the minus $547.7 billion figure shown above. Usually, however, it is not that close a fit.
For 2003, the net export number in the respective quarterly GDP reports averaged about 96% of the reported trade deficits during each quarter. So what I'm going to do here is run a matrix ranging from 91% to 96%, then assume that the only revision in next week's GDP release comes from net exports. This will not be so, of course, but more on that in a moment.
Here's the potential trade-only effect using the matrix (all amounts in billions). The "annual rate" would be the reported revised GDP growth rate, which would compare with the 3.0% rate reported by the Commerce Department in its advance estimate, released on 7/30:
Reported Versus Adj. Annual
Deficit x = ($552.8) GDP* Rate*
---------------------------------------------
($603.2) 91% ($548.9) +$ 3.9 $10781.9 3.2%
" 92% ($554.9) -$ 2.1 $10775.9 3.0%
" 93% ($561.0) -$ 8.2 $10769.8 2.7%
" 94% ($567.0) -$14.2 $10763.8 2.5%
" 95% ($573.0) -$20.2 $10757.8 2.3%
" 96% ($579.1) -$26.3 $10751.7 2.0%
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*Advance estimate reported at $10778.0 bil-
lion. Annual rate computed against final
1Q2004 result of $10697.5 billion.
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I feel very confident the full effect will never be allowed to flow through. For instance, some of the trade deficit might be reallocated to inventories, on the assumption that we import much of what we consume, so inventories are where the imports wound up before getting consumed. Or perhaps the imports actually made it to consumption, thereby increasing personal consumption expenditures. Either assumption or reallocation would blunt, on a dollar-for-dollar basis, the impact of the widening trade deficit as it gets incorporated into GDP.
In addition to these possibilities, there is a chance that some of the other GDP components will be revised upward, exclusive of any direct association with the trade deficit.
But here's the point. The spike in the June trade deficit was so large -- before annualization -- that it will be very difficult for it not to have some dampening impact on overall GDP. If it does not, some suspicion of a little political hanky-panky will probably be in order.
Pressed for a number, I'd say that revised GDP for the second quarter will be reported at a 2.5% to 2.7% rate, versus the initial release of 3.0%.
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NOTE: The three remaining components of this series on economically oriented times that could influence November's election are employment, energy and the stock market. Current plans call for rolling energy and employment into one piece that will likely be out next week.
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ADVANCE ESTIMATE OF SECOND-QUARTER 2004
REAL GROSS DOMESTIC PRODUCT (Released
07/30 -- Billions of 2000 Chained Dollars
at Seasonally Adjusted Annual Rates)
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2Q2004 1Q2004 Change/
Advance Final Impact
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Real GDP 10778.0 10697.5 3.0%
Inventory Change 47.5 40.0 $7.5
Real Final Sales 10728.8 10655.8 2.8%
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Components of GDP
-----------------
Personal Consumption 7562.5 7543.0 1.0%
Nonres. Fixed Investment* 1198.1 1173.0 8.8%
Resid. Fixed Investment 562.3 542.5 15.4%
Net Exports -552.8 -550.1 -$2.7
Government Purchases* 1946.8 1935.8 2.3%
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Implicit Price Deflators:
Gross Domestic Product 3.2% 2.8% --
Gross Domestic Purchases 3.3% 3.3% --
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*MEMO ITEMS
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Government Purchases
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Total 1946.8 1935.8 2.3%
State & Local 1228.7 1222.4 2.1%
Federal 718.1 713.3 2.7%
National Defense 479.9 477.6 1.9%
Nonresidential
Fixed Investment
----------------
Total 1198.1 1173.0 8.8%
Structures 240.7 237.7 5.1%
Equipment & Software 966.4 943.7 10.0%
Info. Processing
Equip. & Software 565.0 547.0 13.8%
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MAJOR GDP COMPONENTS -- CHANGES BETWEEN
"ADVANCE" 2Q2004 AND "FINAL" 1Q2004 ESTIMATES
(Billions of 2000 Chained Dollars at
Seasonally Adjusted Annual Rates)
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2Q2004 1Q2004
Advance Final Change
----------------------------
Real GDP 10778.0 10697.5 80.5
Inventory Change 47.5 40.0 7.5
Real Final Sales 10728.8 10655.8 73.0
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Personal Consumption 7562.5 7543.0 19.5
Nones. Fixed Invest. 1198.1 1173.0 25.1
Resid. Fixed Invest. 562.3 542.5 19.8
Net Exports -552.8 -550.1 -2.7
Govt. Purchases 1946.8 1935.8 11.0
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REAL GROSS DOMESTIC PRODUCT (SEASONALLY
ADJUSTED ANNUAL RATES, 2000 CHAINED DOLLARS)
--------------------------------------------
Year Q1 Q2 Q3 Q4
----------------------------------------
2004 4.5% 3.0% -- --
2003 1.9% 4.1% 7.4% 4.2%
2002 3.4% 2.4% 2.6% 0.7%
2001 -0.5% 1.2% -1.4% 1.6%
2000 1.0% 6.4% -0.5% 2.1%
1999 3.4% 3.4% 4.8% 7.3%
1998 4.5% 2.7% 4.7% 6.2%
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MEMO ITEM: Annual change in real GDP
before and after the "comprehensive
revision" published by the Commerce
Department on 12/10/03.
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1929-2002 1959-1992 1992-2002
---------------------------------
After 3.4% 3.4% 3.2%
Before 3.4% 3.4% 3.2%
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