GDP STRUGGLES TO 2 PERCENT GAIN IN 1995TWENTY-YEAR HIGH IN LEI IS A FLUKE
MARCH RETAIL SALES FALL BELOW EXPECTATI0NS
Today the Commerce Department's Bureau of Economic Analysis announced its final estimate of the change in the real Gross Domestic Product (GDP) in the fourth quarter of 1995. GDP measures the output of goods and services produced by labor and property located in the United States. The final fourth-quarter estimate was that the GDP had gained only 0.5 percent -- even lower than the previously estimated gain of 0.9 percent.
In the first, second, third, and fourth quarters of last year, the GDP grew by 0.6 percent, 0.5 percent, 3.6 percent, and 0.5 percent. For the year as a whole, GDP rose by only 2.0 percent -- the slowest annual growth rate since 1991, in the middle of the last recession.
Contributing to the increase in real GDP in the fourth quarter were increases in exports of goods and services, in personal consumption expenditures, and in nonresidential and residential fixed investment. Offsetting these increases were decreases in the change in business inventories and in federal government expenditures.
There was good news on inflation in today's GDP news release. The report showed that the GDP price deflator decreased from 3.2% to 2.3% to 2.2% to 1.8% from the first quarter to the fourth quarter of last year. For the year as a whole, the deflator stood at 2.4 percent.
So, 1995 turned out to be a year of slow economic growth coupled with a low and declining rate of inflation. How will 1996 turn out? Well, maybe today's report on the Composite Index of Leading Economic Indicators (LEI) can give us a clue.
Today the Conference Board announced that, in February, the LEI rose by 1.3 percent -- the largest jump since January of 1976. Seven of the eleven indicators making up the LEI advanced, with the greatest contributions being made by the average workweek indicator, the S+P 500 stock index indicator, and the change-in-sensitive-materials-prices indicator. In fact, if the contributions from these three indicators were excluded, the LEI would have risen by only 0.24 percent.
The average workweek indicator, by itself, contributed .77 percent to the 1.3 percent reading. So, minus the average workweek contribution, the LEI change would have been +0.5 percent. All that the workweek number was showing was a return to normalcy after the work losses due to the January snow storms and the government shutdown. From August through December, the workweek averaged 41.5 hours. In January, it dropped to 39.9 hours. Then, in February, it returned to 41.6 hours. No big deal.
According to today's LEI report the S+P 500 index rose by 5.72 percent (an annualized rate of 68.64 percent) in February and contributed .15 percent to the monthly LEI total. Well, we know that that won't happen every month.
The change-in-sensitive-materials-prices index contributed .14 percent to the LEI February number. The interpretation of this indicator seems a bit odd to me. In February, sensitive prices declined by 1.78 percent. So, one might expect that the February contribution to the LEI would be negative. But, no. That's not how it works. Going back to January, we find that sensitive prices also declined -- this time by 2.08 percent. Now, the decline in February was less than the decline in January, so, on a relative basis, the February number was more positive than the January number and thus made a positive contribution to the February LEI. Go figure!!
Anyway, I don't think we all need to break into a chorus of "Happy Days Are Here Again" over the February LEI number. As I've said before, one point doesn't make a trend. If you look at the behavior of the LEI over the last year, you'll see that it declined in 8 out of 12 months and that, overall, it is down 2.34 percent.
Because of a government delay in releasing some indicators, the Conference Board was unable to calculate new values for the composite coincident and lagging indicators in time for today's report. But, they promised to bring the data on these indexes up to date in a supplemental report on Thursday, April 4. I'll report on the results as soon as they become available.
Finally, today, Mitsubishi Bank/Schroder Wertheim announced that retail sales at the stores they survey were unchanged during the week ended March 30. This followed a change of -1.0 percent in the preceding week and changes of +1.2 percent, +1.0 percent, and -1.0 percent in the three weeks before that. Around mid-March, Mitsubishi predicted that March sales would rise by 5.5 percent. It doesn't look like this happened. Maybe consumers are pulling in their horns again.
Byline: Lafferty (MF Merlin)