Lies, damn lies and statistics. The advance reading of fourth-quarter U.S. GDP caused a shock when it was released on January 30. The reported contraction in the American economy of 0.1% at an annual rate caught almost every economist by surprise. And that, maybe, is because it never happened.
The drop in the U.S. trade deficit in December reported today suggests that the economy may have expanded slightly in the fourth quarter. The country’s trade deficit narrowed to $38.5 billion, far smaller than expected, and its smallest in nearly three years. Any increase in net exports for a country increases output by definition, and vice versa. When a country runs a deficit in goods and services, as the U.S. does, a decrease in negative net exports — a decrease in the trade deficit, in other words — has the same effect. It reduces the drag the negative demand for U.S. goods and services exerts on the other components of total domestic demand (such as consumer spending, business investment and government spending).
To offset against that — no one said all this number crunching isn’t complicated — a separate report showed that wholesale inventories declined unexpectedly in December. That will offset some of the gains to GDP from the smaller trade deficit. So where will the GDP number for the fourth quarter come out when its first revised reading is published on February 28? Anyone’s guess; Barclay’s is that it will show an 0.3% expansion in the U.S. economy.
That would be well within the average range of a 0.5-percentage-point revision up or down between such first and second estimates over the past quarter of a century. Then there has been on average a further 0.2% tweak when the third estimate comes out a month later. So if history is prologue, by the time the second revise is announced on March 28, U.S. fourth quarter GDP growth could easily have swung from an 0.1% contraction to 0.6% growth. We are reminded of the old Soviet-era adage, only the future is certain because the past is always changing.