Understanding Gross Domestic Product (GDP)

The D stands for domestic and P stands for product. Exports count because they are domestic product.

Imports are irrelevant.

Wait a second you say. The BEA’s formula is: GDP = Consumption (C) + Investment (I) + Government Spending (G) + (Exports (X) – Imports (M))

However, the BEA only subtracts what should not have been counted in the first place. For example, when you buy a tool at Home Depot, no one knows what percentage is from China, Mexico, or the US.

Assume 75% made in China and 25% US. But 100% of that purchase was added to Consumption (C). To make up for what is counted in consumption but shouldn’t be, the BEA subtracts imports.

The BEA should make this clear but doesn’t. I will. Imports do not impact GDP because they are not domestic product.

What About Inventory?

Change in private inventories (CIPI), or inventory investment, is a measure of the value of the change in the physical volume of the inventories—additions less withdrawals—that businesses maintain to support their production and distribution activities.

The steel mills are presumably cranking out steel like mad and sitting on it. But small parts manufacturers are also ordering a the steel and aluminum (or whatever) and hoarding that.

So we have had a lot of production happening at the intermediate levels that may be more artificial than not resulting in inventory volatility.

If the value of that inventory plunges then CIPI plunges. CIPI can also drop if it sold and not replaced.

Now think about GM and Ford. They are scrambling to build cars that nobody wants. However, cars are counted as sold when they are shipped to dealers, not when a consumer buys them.

If car prices crash along with everything else, then CIPI related to cars would crash.

Guessing Game

We are in a big guessing game as to the valuation of inventory stockpiles and whether or not any depletion is re-ordered.

We are dealing with Trump here.

Trump Tariff Pause Ignites Another Mad Dash for Imports

On April 10, I commented Trump Tariff Pause Ignites Another Mad Dash for Imports

Companies cancelled import orders from high-tariffed countries. Now they want those orders.

For how long? Is Trump’s 90-day pause 3 days or 210?

My base case is recession. But did it start in March or will it be postponed until June? Later? Earlier?

GDPNow Spot Check

A quick check on GDPNow shows the current contribution estimate for CIPI is 0.32 percentage points, down from 0.68 percentage points on March 20.

GDPNow made adjustments to its model to handle the surge in gold imports. The BEA handles physical gold as a financial asset but jewelry as a consumer product.

• Nowcast: -0.3 Percent
• Real Final Sales: -0.7 Percent
• Final Sales to Domestic Purchasers: +2.0 percent

That is one hell of a difference between RFS and RFS domestic.

The difference between the Nowcast and Real Final Sales is CIPI. They are off a bit, I presume due to rounding.

CIPI nets to zero over time so the number to watch is Real Final Sales.

And if the number to watch is Real Final Sales, then it doesn’t matter much, in theory, what the heck inventories do.

However, there is a potential for some really big inventory writedowns if hoarders get stuck with too much product and delay production in the future because of it.

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