Wednesday, February 29, 2012

GDP Revision Boosts Services

To me… the key part about the GDP revision is the net UPWARD revision in services spending. In the original estimate this jobs-producing sector of the economy was up at just a 0.2% annual rate. With revisions it is still weak but improved at +0.7%. Those added the tenths of a percentage point mean jobs in this low-productivity sector. In no other sector does demand growth produce job growth as reliably as in services.

On balance a couple tenths of a percentage point on an annualized GDP growth rate is background noise. But the upward revision to services is meaningful especially if that trend (for an upward revision) continues in the next set of revisions. Since consumer confidence is improving through February and since we know what job growth was in Q4 it seems that spending on services must be continuing because the job market must be improving- all indicators are that it is doing just that. And if more people are at work in significant numbers it means there must be services jobs since construction is not going to absorb too many new workers despite its recent revival and manufacturing output is largely about new machinery and enhanced productivity...and some, some, jobs but only ‘some’ jobs. Jos about the services sector hence IT is in the spotlight.

For the moment the strength in the jobs numbers and in the Conference Board’s labor-market-centric view of consumer confidence suggest that GDP and service sector growth MUST STILL BE powering ahead.

About GDP
Consumption growth at 2.1% is at its best since Q4 of 2010 when it rose at a 3.6% pace; ‘durables’ spending at a 15.3% pace is at its best since that same quarter.

Business investment was revised UP on one of two prongs: one, much less weakness in structures at -2.6% up from -7.2% and, the other, equipment, where spending cooled at 4.8% pace down very slightly from 5.2%, previously.

Housing improved strongly quarter to quarter and in the revisions compared to the ‘advance’ number with the estimate of spending up to 11.5% from 10.9% after revision.

The inventory revisions cut into growth but only slightly as growth in inventories was reduced to $54.3bln from $56.0 bln – a minor impact on GDP.

The net export (Current Account deficit) impact on GDP was slightly positive as net exports rose to -$404.4bln from -$405.8bln in the advance estimate.    The inventory and trade revisions just about wash each other out, as is often the case.   Exports slowed on revision but imports, a larger flow, slowed a bit more.

Finally government spending was slightly less weak in the fresh estimate at -4.4% up from -4.6%.

On balance the GDP revisions were rarely very large and they were in both directions by component leaving the overall GDP estimate only slightly stronger. In my view the upward revisions to services spending is the significant part of this report.