What offset the increase in gross domestic product this quarter?

Market Realist

Why GDP is a country's most comprehensive economic scorecard (Part 7 of 8)

(Continued from Part 6)

What offset the increase in GDP this quarter?

The following offset the increase in GDP this quarter:

  • Drop in exports
  • Reduced non-residential fixed investment
  • Decrease in residential fixed investment
  • Decrease in private inventory investment
  • Deceleration in goods PCE
  • Decrease in State and local government spending

Exports and imports

Net exports, that is, exports minus imports, are a drag on total GDP because the U.S. regularly imports more than it exports, and so, net exports are in deficit. When the net export deficit becomes less negative, it adds to growth because a smaller amount is subtracted from GDP. When the deficit widens, it subtracts even more from GDP.

Exports decreased by 7.6% in Q1 2014, compared to a 9.5% increase in Q4 2013, bearing a negative effect on the GDP. The drop in exports took away 1.07% points from the GDP. On the other hand, real imports of goods and services also decreased by 1.4% in Q1 2014, compared to a 1.5% decrease in Q4 2013, giving a boost to the GDP.

Non-residential fixed investment

Real non-residential fixed investment, primarily supported by increase in industrial activity, decreased by 2.1% in Q1 2014, compared to a 5.7% increase in Q4 2013.

The performance of industrials ETFs like the SPDR Industrial Select Sector Fund (XLI), which has companies like General Electric Corporation (GE) and Boeing Corporation (BA) in its portfolio, the Vanguard Industrials Index Fund (VIS), and the iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ), also serve as good indicators with respect to the industrial sector.

Private inventories and final sales

Real private inventories, which are subtracted while calculating the GDP increased by 0.57% in Q1 2014, compared to 0.02% in Q4 2013, as private businesses increased their stock of inventory. At the same time, real final sales of domestic product increased by 0.7% in Q1 2014, compared to 2.7% in Q4 2013. Final sales of domestic product equal GDP less change in private inventories. When final sales are growing faster than inventories, it points to increases in production in the months ahead. Conversely, when final sales are growing more slowly than inventories, they signal a slowdown in production.

The next part of this series talks about key takeaways for investors from the GDP estimate release for the first quarter, and for the GDP reading in general.

Continue to Part 8

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