GDP Growth Was Better Than It Looked

The U.S. Bureau of Economic Analysis or BEA reported that the economy grew by 1.6% in the March quarter vs. growth expectations that ranged from 2.1% to 2.7%. Keep in mind that one shouldn’t read too much in any quarter’s GDP growth rate (or declines), especially since the calculations are based on quarter-to-quarter comparisons.

There are four key high-level components to the United States economy. They are Personal Consumption, Gross Private Domestic Investment, Net Exports of Goods and Services and Government Spending. Personal Consumption is the most important segment since it indicates consumers health and is about 69% of the total economy.

Gross Private Domestic Investment is the second most important segment since it is approximately 18% of the economy and provides insight on how company CEOs view the economic outlook. Within Gross Private Domestic Investment the change in inventory levels can add or subtract a meaningful percentage of economic growth in any individual quarter. In the March quarter it subtracted 0.35% from the total growth rate compared to a negative impact of 2.22% in the March 2023 quarter.

While Net Exports of Goods and Services is important for an economy, its impact in any given quarter can be highly variable and hide what is actually occurring. It subtracted 0.86% from the March 2024 quarter, while adding 0.58% a year ago.

Lastly, government spending is not an indication of the economy’s underlying strength or weakness. While it only added 0.21% in the March quarter, its impact was a positive 0.82% a year ago.

Better Reading On The Economy

I believe a better calculation to understand the strength or weakness of the economy is to remove the inventory changes and government spending. This results in using Personal Consumption, Gross Private Domestic Investment without the inventory impacts and adds the Net Exports of Goods and Services.

Below is how the economy has performed from the beginning of the Covid pandemic and its recovery. Post the initial shutdown of the economy there has only been one quarter, March 2022, that the economy has declined.

• 1Q 2020: Negative 4.8%
• 2Q 2020: Negative 25.8%
• 3Q 2020: Positive 27.4%
• 4Q 2020: Positive 4.7%

• 1Q 2021: Positive 6.3%
• 2Q 2021: Positive 8.9%
• 3Q 2021: Positive 0.6%
• 4Q 2021: Positive 2.7%

• 1Q 2022: Negative 1.4%
• 2Q 2022: Positive 1.8%
• 3Q 2022: Positive 2.8%
• 4Q 2022: Positive 0.1%

• 1Q 2023: Positive 3.7%
• 2Q 2023: Positive 1.5%
• 3Q 2023: Positive 2.6%
• 4Q 2023: Positive 3.1%

And Possibly A Better Calculation

A second calculation would be to remove the Net Exports component, along with the inventory changes and government spending, since it is partially dependent on how non-US economies are doing. Except for a weak spot in the second half of 2022 when the Federal Reserve was raising interest rates and concerns a recession would result, the economy has been growing at a nice clip.

• 1Q 2020: Negative 4.8%
• 2Q 2020: Negative 26.8%
• 3Q 2020: Positive 30.0%
• 4Q 2020: Positive 6.2%

• 1Q 2021: Positive 7.3%
• 2Q 2021: Positive 9.8%
• 3Q 2021: Positive 1.6%
• 4Q 2021: Positive 3.1%

1. 1Q 2022: Positive 1.2%
2. 2Q 2022: Positive 1.3%
3. 3Q 2022: Positive 0.3%
4. 4Q 2022: Negative 0.2%

• 1Q 2023: Positive 3.1%
• 2Q 2023: Positive 1.5%
• 3Q 2023: Positive 2.6%
• 4Q 2023: Positive 2.8%