U.S. GDP Growth Revised Down, but "Stronger" Overall

The Bureau of Economic Analysis, a division of the U.S. Department of Commerce, provides estimates of the prior-quarter inflation-adjusted (“real”) Gross Domestic Product (GDP) once per month. The so-called “advance” estimate, provided in late January for the fourth quarter of 2014, reckoned GDP grew 2.6%. The second estimate, provided last week, revised down the initial estimate by four tenths of a percentage point to 2.2%. The main drivers of the new estimate were lower consumer spending on goods and weakened net trade. Economists at Goldman Sachs argued that although the second estimate was lower than the advance estimate, the revision indicated a “stronger composition of Q4 growth” because inventory accumulated at a slower pace than originally imagined. In response, they left their estimate for first quarter 2015 GDP growth (to be officially announced near the end of April) at 2.7%.

Looking at monthly data for the past ten years, the correlation between ten-year Treasury yields and GDP is highly insignificant. Economic growth, as measured by GDP, instead provides an assessment of corporate business activity, consumer spending, and trade activity. A better indicator of ten-year yields is inflation. Furthermore, we believe the Fed is the primary driver of interest rates, particularly this year given the possibility of a policy rate target increase in 2015. Since economic growth is not a part of the Federal Reserve’s dual mandate of price stability and maximum employment, we do not see interest rates moving higher on growth alone. Our duration positioning remains neutral on weak domestic inflation and outright deflation around the world, where it seems interest rates will remain anchored rather than buoyed.

Sources: BEA, GS, Bloomberg, SNWAM Research