Why Fourth Quarters Are the New Growth Laggards


    The economy has often appeared weaker than it is at the beginning of the year because of how the government measures growth. But after years of grumbling from financial heavyweights, officials say they have have solved the problem.

    First-quarter gross domestic product growth from 2012 through 2017 has averaged an annual rate of 2.1%, according to fresh data the Bureau of Economic Analysis released Friday in a periodic revision. That is substantially higher than the previous 1.6% average, which made it the weakest of the four quarters. Changes to seasonal adjustment typically increase growth in some quarters at the expense of others with no impact on the year as a whole. That effect, along with other revisions, resulted in the fourth quarter now clocking the slowest average growth at 1.7%.

    When not seasonally adjusted, economic growth is typically slower in the first three months of a year because of harsher weather and other regular spending patterns. The government attempts to adjust for this to give a better sense of underlying economic activity.

    BEA had taken multiple steps to address so-called “residual seasonality” in its data that made growth at the start of each year appear misleadingly sluggish.

    Those initial attempts to fix the issue helped, but data testing by different analysts revealed first-quarter growth still appeared weaker, with multiple components of GDP, including national defense spending, continuing to skew the numbers.

    After the bureau began seasonally adjusting some underlying data that hadn’t previously been touched, along with other tweaks, the seasonality appears to have all but disappeared from GDP data.

    “Based on what we have done and our tests, we are not showing signs of residual seasonality,” said Erich Strassner, associate director of BEA’s National Economic Accounts division.

    Mr. Strassner acknowledged they would need to continue testing the data to see if the pattern arises again.

    Other key takeaways:

    Economic growth at the end of 2017 was significantly slower than the government originally published. BEA said GDP growth in the third and fourth quarter was 2.8% and 2.3%, respectively, down from the 3.2% and 2.9% originally reported for the two quarters. Overall growth for 2017 was revised down because of weaker consumer spending and exports and stronger imports, the latter of which subtracts from economic growth in the government’s calculation.

    The final two quarters of last year were initially a part of a strong three-quarter stretch of growth President Donald Trump’s administration and other economists were touting as the start of a new, robust growth trend in the economy.

    Over the past decade, average GDP growth was slightly better than previously thought, with growth between 2007 and 2017 averaging 1.5%, above the previous 1.4% average. Investment was higher than data initially suggested, which would have boosted growth in the last decade even more, but the U.S. bought more foreign-made goods, which partially offset the ramped-up investment.

    The government revised its investment measure up from 2007 to 2017 because it found companies had made expensive cloud-computing investments, but they were buried deeper in the data, classified in different miscellaneous categories. BEA also reworked how it calculated research and development spending on original production of software.

    The economy has experienced a bout of puzzlingly low productivity growth, much to the consternation of economists. Business investment in new machinery and software helps companies increase the efficiency of its operations and employees. Some analysts have argued widespread technology investment isn’t reaching all industries fast enough, which is likely contributing to the slower productivity growth in the U.S. Friday’s revisions could suggest companies were investing more than economists are currently aware of.

    The average personal saving rate in the last five years was revised up to 7.0 from 5.0, but it wasn’t entirely because Americans saved more of their paychecks than thought. Sole-proprietor and partnership income from 2012 to 2017 was significantly higher than originally published because of misreporting on income-tax forms. Spending, however, wasn’t revised up along with the increased income, which is why the saving rate moved higher.


    U.S. Economy Grew At 4.1% Rate in Second Quarter 

    Despite Attempts to Fix the Data, First-Quarter GDP May Still Mislead (April 27, 2018)

    Why First-Quarter Growth Is Often Weak (Apr 25, 2017)

    Read more: blogs.wsj.com


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