The wonderful, and at the same time deceitful, aspect about math is that if you know how the inputs move the outcome, you’re able to shape a particular outcome.
The revised Q4 2015 GDP number, which was upwardly revised to by 0.3% to 1%, does not paint as pretty of a picture that the hawkish Fed heads (cough cough Mester, Williams, Lacker, and George), out of touch politicians, and financial media would want you to believe.
This is the equation for GDP, utilizing the Expenditure Approach:
GDP = C + I + G + (X − M)
C stands for personal consumption expenditures; I stands for private investment; G stands for government spending; and (X − M) equals net exports, i.e., exports – imports.
Here’s where the math gets fun. Inventories, which is baked into private investments due to businesses incurring the costs to produce a good, turned out to be higher than originally estimated.
Per the WSJ and all other business media outlets, “U.S. businesses pared back inventories much less than initially estimated in the fourth quarter.” Translation: Inventory levels increased higher than we thought.
Is this a result of businesses building up stockpiles for an increased demand, or they haven’t sold as many of their goods? Look no further for the answer in the revision to personal consumption, or the consumer.
Consumer spending increased 2% in Q4, but that’s lower than the initial 2.2% estimate. It’s also lower than the Q3 annualized projection of 3%. I thought the Fed told us lower oil prices would lead to higher consumer spending?
I’m here to tell you people are spending money! Seriously, think about the last time you went on spending spree and throwing out money like 50 Cent at a strip club.
Lastly, imports fell lower than initially forecasted, revised down to 0.6% vs. 1.1%. These are foreign made goods that were purchased domestically. So again, spending was actually lower.
Getting back to our equation…Increase in private inventories will drive GDP up, but businesses are not selling as much because consumers aren’t spending but that’ll move GDP down. However, with less imports than thought (again spending not happening), net exports increase, which drives up GDP.
Make sense?
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So net-net GDP is up .All good.