Out of Sight, Out of Mind?

The Bureau of Economic Analysis announced US GDP increased at a 1.7% annual rate (0.4% q/q) during Q2 2013, beating consensus estimates. Perspectives on the data varied—some claiming faster-than-expected growth is tied mostly to inventory builds. We’d argue, first, growth is growth. Second, GDP is often an imperfect measure of an economy’s health or growth prospects. For example, many in the media are harping on the historical revisions to the data series that goes back to 1929, which boosted the long-run average GDP growth rate by 0.1%. While making for interesting trivia, the change doesn’t impact capital markets at all.

More impactful, looking forward, is whether economic reality exceeds investors’ expectations. And a close look at GDP’s components suggests it does. For example, despite laments growth was “led by inventories,” on a contributions-to-growth basis, the biggest single contributor was business investment, which added a full 1.3%. Inventory change, a subcomponent of business investment, added 0.4%.

Exports also grew 5.4%, suggesting weaker growth in China, the eurozone or elsewhere isn’t as much of a drag as many fear. Another positive! But since exports didn’t grow enough to offset imports, trade detracted from the headline number. This is another reason GDP isn’t perfect at measuring economic strength. From a pure economic health standpoint, total trade (exports plus imports) is a more valuable reading than the GDP report’s net trade calculation. Exhibit 1 shows Q2 2013 saw a sharp upturn in total trade—in fact, it logged the quickest growth since 2010.

Exhibit 1: Percentage Change in Real Total Trade

Source: US Bureau of Economic Analysis, data accessed 8/1/2013.

Imports grew so much—9.5% seasonally adjusted annual rate in the quarter—they subtracted 1.5 percentage point from growth. Yet rising imports don’t imply “weak growth” or slack demand. They imply domestic demand is growing—a sign of a robust economy!Falling imports, by contrast, would potentially be cause for concern even though they contribute positively to GDP. Growing imports and exports should be cheered, not jeered—yet another underappreciated aspect of US economic strength.