First quarter GDP revised downward to +2.4%


Nov. 20 2020, Updated 12:41 p.m. ET

Increases in Gross Domestic Product (GDP) is a measure of economic growth

Gross domestic product is what is referred to generally as “the economy.”  It is the sum of consumption, investment, and government spending. Another way to think of GDP is the output of goods and services produced by labor and property in the U.S. economy. This number is an estimate of growth. The U.S. economy is roughly $16 trillion.

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The Bureau of Economic Analysis puts out three estimates of GDP growth after a quarter ends. The advance estimate is released within a month of quarter end, and is based on incomplete data or data subject to revision. The second is released after two months, and the third and final revision is released after three months.

Consumption is by far the biggest driver of GDP growth and accounts for something like 70% of GDP. The reason for the Fed’s quantitative easing program is targeted at consumption – if the Fed can lower mortgage rates enough that people can refinance, then they will have more disposable income and hopefully spend more. Investment is basically corporate investment in growth, also known as capital expenditures. Government spending is the final component.

Highlights of the Q1 release

The advance estimate of Q1 GDP showed GDP grew at an annualized pace of 2.5% between the fourth quarter of 2012 and the first quarter of 2013. The first revision lowered that estimate by 0.1% to + 2.4%. In the fourth quarter of 2012, growth increased at 0.4%. Personal consumption, residential and non-residential fixed income increased, which positively affected GDP growth, while government spending, both at the Federal and state/local level contributed negatively.

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The price index increased at 1.2% annually, an upward revision of 0.1% but below Q4′s 1.6% pace. Ex food and energy, prices increased 1.4%. This is still below the rate the Fed would like to see. Personal consumption expenditures were revised upward: 0.2% to 3.4%  in the first quarter, compared to an increase of 1.8% in Q4. This is surprisingly high given that the payroll tax cut expired at the beginning of the quarter, along with higher taxes on upper incomes. Exports and imports increased, but imports increased more, so the trade balance was a net negative this quarter.

The effect of government spending is igniting a political debate in Washington. Certain economists are in favor of having government spending increases in order to push economic growth. This is what is known as Keynsian stimulus spending – when the private sector won’t spend, the government can step in and pick up the slack. Politicians on the left will point to the effect decreasing government spending has had on GDP growth; politicians on the right will point out that government spending is roughly 24% of GDP, the highest since the Truman administration.

Implications for home builders

Home builders are sensitive to the general economy, particularly the job market. GDP growth of 2.5% should be enough to slowly heal the labor market and increase the capacity utilization numbers. Stronger consumption numbers are clearly a good sign for them.

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Overall increases in business activity and the consumption is starting to drive more business for home builders, like Lennar (LEN), KB Homes (KBH), Toll Brothers (TOL), Meritage (MTH) and NVR. Housing starts have been so low for so long that there is some real pent-up demand that will become unleashed as the economy improves. The secular story for home builders is optimistic – household formation numbers will be a real wind at their backs.

Home building can become a real virtuous circle for the economy, and explains why the recovery has been tepid so far. Historically, home builders were the first to recover after a recession – construction and home building usually led the economy out of a recession. This time around, that didn’t happen because of the shadow inventory, which meant that economic growth was more tepid during this recovery. That appears to be changing.


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