Friday, April 30, 2010

Final Sales of Domestic Product: First Quarter 2010

The GDP report came out, and as usual, the headline is the real GDP figure. Real GDP increased at a 3.2 percent annual rate in the first quarter of 2010.

However, I always scroll down to see what has happened to total cash expenditures. My preferred measure is Final Sales of Domestic Product. The value of the first quarter 2010 was $14,568 billion. The annual rate of increase was 2.51 percent.

The good news is that cash expenditures have nearly returned to their peak value before the recession of $14,583 billion in the 3rd quarter of 2008. The shortfall is less than .1 percent.

On the other hand, if cash expenditures had continued on its 5 percent trend growth path of the Great Moderation, it would now be $16,311 billion. The current level is 11.3 percent below trend.

Even with a modified growth path of 3 percent, changing at the peak in the third quarter of 2008, the target level would be $15,723 billion, and so the current value is 7.63 percent too low.

Worse, a 2.5 percent growth rate will never return to a higher 3 percent growth path, much less a 5 percent one. Surely, it is better for cash expenditures to rise rather than fall, but the current growth rate remains too low.

I believe that the Fed should commit to returning Final Sales of Domestic Product to the 3 percent modified growth path next year. It is now the second quarter of 2010, and so, one year from now, in the second quarter of 2011, cash expenditures should be $16,324 billion. That would be an increase of 12 percent from last quarter, or averaging a 9.6 percent annual growth rate for the current and next 3 quarters.


  1. My ARMA model (which usually under-predicts volatility) for RGDP, predicted a 5.17% increase yet we got 3.2% While that is within the margin of error, it still makes me suspect (unscientifically) that something isn't quite right.

  2. I believe it’s always expected to see such GDP figures; it’s must that we plan our strategies around it. I definitely do that and with OctaFX broker, it’s all too easy using their low spreads starting from 0.1 pips to high leverage up to 1.500 while there is also massive rebate program where I get 50% back on all trades which is even with losing one, so I find it very good and helps me in working nicely with things.