The economic reports on Thursday were strong except for industrial production. GDPNow creator, Pat Higgins, explains the decline.
Please consider the GDPNow Nowcast for 2024 Q3.
Latest estimate: 2.4 percent — August 15, 2024
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2024 is 2.4 percent on August 15, down from 2.9 percent on August 8. After recent releases from the Treasury’s Bureau of the Fiscal Service, the US Census Bureau, the US Bureau of Labor Statistics, and the Federal Reserve Board of Governors, the nowcast of third-quarter real gross private domestic investment growth decreased from 2.8 percent to 0.0 percent.
Change in Private Inventories
Real Final Sales is the important number not the headline number. The difference is Change in Private Inventories (CIPI) which nets to zero over time.
I had expected a surge in the Nowcast based on retail sales and import-export prices. Import prices were only up 0.1 percent while export prices rose 0.7 prevent.
However, I had not looked at the Industrial Production report which was strongly negative.
Email Exchange with Pat Higgins, GDPNow Creator
I asked Higgins: Why the big negative change in CIPI?
Hi Mish,
It looks like the majority of the decline was due to the model’s forecast for motor vehicle and parts dealer inventories falling. The industrial production variable for motor vehicle assemblies is one of the variables used within the model to make that forecast, and those assemblies fell a little more an 12 percent from June to July according to the IP report.
The forecast for merchant wholesaler inventories also went down a bit; a few of the IP report variables are used in the vector autoregression model forecast for it as well.
Also the change in inventories for Q2 was revised up based on upward revisions to retail inventories in today’s release. That accounted for something like 15% of the inventory contribution going down (if CIPI goes up last quarter, change in CIPI goes down this one).
Best regards,
Pat
Thanks Pat!
Retail Sales Surge In July from Smaller Negative Revision
Earlier today I noted Retail Sales Surge In July from Smaller Negative Revision
Advance retail sales rose 1.0 percent in July from a negative 0.2 revision led by autos. I’m skeptical because of how auto sales are counted.
Motor vehicle sales are counted when shipped from the manufacturer to the dealer no matter how long the cars sit on the lots. This grossly distorts auto sales.
Industrial Production
Also on Thursday, I noted Industrial Production Declines 0.6 Percent on Top of Big Negative Revisions
Synopsis
- Motor vehicle assemblies are down 12+ percent.
- Motor vehicles and parts sales are up 3.6 percent after falling 3.4 percent last month.
- Retail sales surged a full percentage point.
- Import prices were only up 0.1 percent while export prices rose 0.7 prevent.
GDPNow Percentage Point Contribution Change
- PCE Goods: +0.22 PP, Retail Sales Report (Addition to Real Final Sales)
- PCE Services: -0.21 PP, Industrial Production Report (Subtraction from Real Final Sales)
- Net Import/Exports: +0.05 PP, Import-Export Prices (Addition to Real Final Sales)
- Gross Private Domestic Investment: -0.50 PP (Hit to top line)
The net result was Industrial Production + Retail Sales netted to zero in terms of Real Final Sales and that’s the important bottom line number.
I had not looked at Industrial Production when I tweeted that I expected a rise in GDPNow from Thursday’s economic reports.
Meanwhile, it appears that auto sales are simultaneously very weak and very strong, something that only a random number generator could concoct.
Based on Higgins’ comments, it appears we may have a small upward adjustment to the top line of GDP Q2 in the next revision. That is in isolation and assumes no other changes.
Estimating Further Negative Revisions to GDI For the First Quarter
On August 9, I did a post Estimating Further Negative Revisions to GDI For the First Quarter
The BEA’s initial GDI growth estimate for the first quarter was 1.5 percent, later revised to 1.2 percent. I expect further negative revisions. Here’s a “What if” take.
Looking ahead, I expect negative revisions to the retail sales numbers, and economic reports in general.
Question for Mish: Is there a sector breakdown of GDP? I’m sure that the gov’t doesn’t want to report that any sectors are contracting, because journalists would jump on it. But it would be just as interesting as the usual GDP breakdown.
The GDP reports are very detailed so I don’t understand the question. GDPNow forecasts have similar details. GDPNow got smacked today. I will post a chart later.
I don’t think I’ve seen “Residential RE is contracting at 1.8% y-o-y, Business Services expanding at 2.6% …” and on down the line of the ten or twenty major sectors of the economy. It’s only at a less granular level of sector, something like 4 major sectors.
This would be a stock market sector view of the economy. I don’t care about imputed rent, or investment vs. consumption, even if that is the economists’ most reliable way to get to GDP. I’d gladly give up some accuracy if I could have more relevant data (by sector).
Yahoo Finance says there are 11 sectors, each with a number of sub-industries. I would love a waterfall chart that estimates the contraction/expansion for each, adding up to report GDP.
Yahoo: “Here’s an at-a-glance look at what the 11 market sectors are and the number of industries they represent:”
Conflicting numbers are what slowing economies are made of. GDP around 1-2% at best and economy still at stall speed
FWIW, I think the next time down for the economy might be similar to Japan in the 1990s. When the Japanese central bank repeatedly stepped in, it had no effect each time they did it beyond a certain point. The US has been going down this path for each financial crisis that occurs. To be certain, the Fed does have way more bullets than the Japanese central bank had. This is part of the reason why Powell raised rates. But in my view, he did not act quickly enough to quell inflation. Now it is like trying put toothpaste back in the tube.
A problem with ‘real final sales’ is we don’t count widgets, but dollars, effectively eliminating identifying productivity and population changes. For example, motor vehicles/parts down 7.8% in July, might be exaggerated by less overtime production, or a change in product mix (shifting to smaller cars).
The Fed played no role in our recent bout of inflationhttps://jabberwocking.com/the-fed-played-no-role-in-our-recent-bout-of-inflation/
Kevin Drum lost credibility with this inanity: ‘…In 2022 the Fed began raising interest rates. By June, rates went above 1% for the first time…’ (SINCE???)
The Fed suppressed interest rates (a negative real rate) for a very long time, much the same as Japan’s Abenomics. We do not know the long term impact, yet.
Further, there is little understanding of the complex interactions of the financial system over time, and what we don’t know–what would’ve happened without the Fed’s manipulations.
Exactly. This goes back to the 2000s and 2007/08 financial crisis. The economy never truly recovered from that imo and the Fed and Treasury just papered over it. There are still dead assets on the books of banks from that crisis and supported by commercial real estate bonds purchased by the Fed. The Fed has turned into the buyer of last resort since 2008 for many assets. Many banks have piled into these assets knowing this and it has caused money to go into assets that investors know has a backstop. This has led to even worse behaviors. With so much commercial real estate available, I see more commercial real estate being built.
When they fake numbers sometimes they get caught in their lies?
There is less being made and less being sold. Only the amount of money spent increases. Prolonged inflation leads to shortages and depression.
‘Real’ supposedly removes inflation. What we don’t know is has the real cost increased and we are producing fewer widgets?
Detroit is dimly aware that all EV investment is a write off. The Artificial Intelligence, Internal Combustion Engine, and robotics industries are doing fine.
If EV sales rise, so will sales of extension cords.