Madness

JACKSON HOLE, Wyo. -- Quit reading now if you ain't into

GDP

math. Otherwise grab a pencil and a piece of scratch paper.

Gross domestic product

(or GDP)

equals personal

consumption

plus

investment

plus

government

spending plus

net exports

(exports minus imports).

Investment accounts for roughly 16% of GDP. It comes in the form of business inventories; residential buildings; commercial buildings; and what the government calls

producers' durable equipment

(or PDE). PDE is commonly known as business investment; it accounts for roughly 51% of total investment and roughly 8.1% of GDP.

Why the accounting introduction? Because

durable goods

numbers were released today, and they provide a peek as to what kind of performance PDE will show when first-quarter GDP numbers are released on Friday.

PDE comes in the form of aircraft (roughly 4.5% of the total); motor vehicles (roughly 19.5% of the total); and All Else (roughly 76%), which consists of things like information processing equipment and computers and peripherals. The recent performances of these three animals are listed in the latter columns in the table below.

The durable goods

release contains a series called nondefense capital goods shipments excluding aircraft (or NDCGSEA). This is what's used to approximate All Else; then the

BEA

combines that with plain old aircraft and motor vehicles to produce the PDE portion of GDP.

Cool?

Two notes.

  • During the first quarter of the year NDCGSEA fell for the first time since the third quarter of 1991. This, alongside sorry vehicles and aircraft performances, produces a rare triple-whammy. (Refer to the table and note that during the past two years, not even two components of business investment have posted decreases during the same quarter.) So, when the GDP report is released on Friday, no one should be surprised to learn that PDE softened between the fourth quarter and the first.
  • (Technical note: PDE will not necessarily end up subtracting from the growth rate published Friday. Why? Because the numbers we've been discussing here are "nominal" ones, not "real" ones; that is to say, they haven't been adjusted for inflation. Recall that a real variable equals its nominal counterpart divided by the appropriate price level. Then note that if the prices and shipments of business investment goods both fall, but prices fall faster, then shipments will actually show an increase on a real basis; this is the basis on which GDP numbers are reported. So, depending on what BEA has prices for business investment goods doing during the first quarter, anything is possible.)
  • That development will, just as it did during the fourth quarter of 1997 and again during the third quarter of 1998 (see table), prompt some economic forecasters and analysts to conclude that the investment boom is ending. And, as was the case in both 1997 and 1998, the call is again likely to prove premature. Why? Because orders during one quarter usually mean shipments the next, and orders for nondefense capital goods excluding aircraft jumped 13.7% during the first quarter. That, plus the fact that the NAPM new orders index rose markedly and steadily between December and March, suggests that business investment isn't dying.

Anyway.

I wrote this column for two reasons.

The first was to illustrate (or try, anyway) how an ordinary economic release like the durable goods report fits into the overall growth picture. Releases like this may not always seem useful, but they are; there's a method to the madness.

The second was to give you an alternative to all the crap you read and hear about a release like durables. The volume of just-plain-stupid comments that come in the wake of a release like this is staggering. All kinds of people who have no business at all weighing in on what durables do and don't mean -- people who have never even once actually looked at the source data -- draw all kinds of idiotic conclusions that simply aren't true.

And one ought to be aware that it's precisely such "analysis" that gets people quoted in the press.

Side Dish

Thanks Mike.

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