The good:

The bad:

- GDP second release vs. advance

- GDP vs. GDI

- GDP Plus

- Discretionary spending

- 'Residual' seasonality

- Inventory cycle

- Chart pack -- full details

Both measures -- Gross Domestic Product and Gross Domestic Income -- should be equal (income = expenditure) but the data sources used to produce them are different and there is no effort to reconcile them, thus both contain valuable information. GDP uses the final expenditure approach and GDI is measured using the income approach. GDI is not available at the time of GDP's advance release and often gets relegated to a secondary role, although some researchers point to GDI as a better gauge of the economy (e.g., Nalewaik, J.J. (2010), “The Income- and Expenditure-Side Estimates of U.S. Output Growth," Brookings Papers on Economic Activity, 1, 71–127).

The chart below plots both GDP and GDI. Interesting to note that GDI was flat ahead of the last recession while GDP was still trending up -- so, in that case, GDI provided a better heads-up for the incoming recession.

Another way of looking at the discrepancy between income and expenditure is to look at household savings rate. Consumers held off buying despite healthy income gains.

An estimate of growth using both GDP and GDI is produced by Aruoba, Diebold, Nalewaik, Schorfheide, and Song (ADNSS) and is called GDP Plus. The authors view GDP and GDI as noisy measures of the underlying latent true GDP. Their results are published regularly in the Philadelphia Fed web page. GDP Plus tends to smooth the quarterly changes. The reading for GDP plus in 1Q16 was 2.3% vs the 0.8% in the second GDP print.

Discretionary spending often slows down ahead of a recession, and given the weakness in some recent economic and financial indicators at the turn of the year, it is interesting to look at some charts to gauge the behavior of discretionary spending.

The ratio of growth in spending on consumer durables and private investment to final sales growth (the "Duncan" indicator) is a useful indicator. The chart below shows that this indicator usually turns down before the recession (shaded areas in the chart). The first chart considers total private investment and the second excludes investment in the energy sector. Both suggest discretionary spending slowed down. The indicator ex. energy has not consistently turned down, but it bears watching.

Another way to look at discretionary spending is to look at the share of the income spent on those items. The chart below highlights that consumption of durable goods and investment is still at low level as a share of income. Even excluding residential investment, it seems that there would be room for the share of discretionary spending in total income to grow. Nevertheless, it has turned south since early 2015. Even when one excludes energy, there is a down tick in both 4Q15 and 1Q16 that is important to monitor.

Regarding 'residual' seasonality one can make a very simple adjustment by applying a simple seasonal filter to BEA's published GDP statistics. As the chart below shows, that would move 1Q GDP from 0.8% to 2.4%, more aligned with the growth of GDI reported earlier.

The ISM data still hints at further downside to growth coming from inventory adjustment.

Given the weakness in some recent economic and financial indicators, it is interesting to look at some charts that historically have shown turning points in the economy.

The flow of credit to the economy (as a share of GDP) often -- but not always -- peaks ahead of or coincidently with recessions. The chart below shows that, overall, credit flows are at a relatively modest pace for both corporates and households (compared to the history since 1970). Nevertheless, the pace of credit creation has slowed for households since 1Q and nonfinancial corporates since 2Q. Bank lending data at a higher frequency (weekly) does not suggest a material slowdown in credit, but this bears watching given the sharp widening of HY spreads.

Another point worth looking is the strength in discretionary spending. One way to look at it is to calculate the ratio of growth in spending on consumer durables and private investment to final sales growth (the "Duncan" indicator). The chart below shows that this indicator usually turns down before the recession (shaded areas in the chart). The first chart considers total private investment and the second excludes investment in the energy sector. So far discretionary spending is not signaling an impending recession.

Another way to look at discretionary spending is to look at the share of the income spent on those items. The chart below highlights that consumption of durable goods and investment is still at low level as a share of income. Even excluding residential investment, it seems that the share of discretionary spending in total income is low. Excluding housing and energy, one can see that the share of discretionary consumption/investment is still increasing.

Personal consumption excluding energy keeps growing...

...in current prices...

...and volumes.

So the slowdown in the previous couple of months is entirely due to energy. This mirrors the conclusion I had when looking only at the narrower retail sales data (US Retail Sales -- trend remains unchanged.

Income and spending (ex energy) are growing at roughly the same pace. But the slower pace of growth in total consumption (including energy) means savings rate is increasing.

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Charts below are for Nonfinancial Domestic Corporate sector -- the ones in "A closer look at US corporate profits and cash flow (updated with Q3 2015 results)" are for total US corporate sector.

Total nonfinancial domestic profits from current production currently at $1.3tn.

Below total nonfinancial domestic profits from current production after taxes.

Out of the $0.96tn $0.94tn in after tax profits, 60% 61.6% is dividends and 40% 38.4% ($390bn $358bn) is saved.

It is also possible to calculate cash flow -- which is undistributed profits puls depreciation less (net) transfers. It is a measure of internal funds available for investment.

The national accounts also provide a measure of profits after tax without IVA and CCAdj. This is the measure often used in comparisons with the S&P measures of reported earnings.

Let's take a look at what is happening with US corporate profits. But before, allow for a brief digression on what is and what is not calculated in the US National Accounts statistics.

BEA's main measure of corporate profits is profits from current production. It provides a comprehensive and consistent economic measure of the income earned by all US corporations. It is unaffected by changes in tax laws, and it is adjusted for nonreported and misreported income.

Profits from current production is derived as the sum of (a) profits before tax ("book profits", based on tax-returns provided by the IRS; financial-accounting information is used for the most recent periods) , (b) inventory valuation adjustment (IVA), and (c) capital consumption adjustment (CCAdj).

IVA: gains or losses resulting from inventory withdrawals are not considered income from current production. The IVA converts business-accounting valuation of withdrawals from inventory to a current-cost basis by removing the capital gain or loss element that results from valuing these withdrawals at prices of earlier periods.

CCAdj: converts valuations of depreciation (based on tax code parameters) to valuations that are based on empirically based depreciation patterns, and convert the measures of depreciation to a current-cost basis by removing the capital gain or loss that arises from valuing the depreciation of fixed assets at the prices of earlier periods.

Profits from current production can be "national" (including net profits / transfers "originating in the rest of the world") and "domestic". The profits component of domestic income excludes the income earned abroad by US corporations and includes the income earned in the US by foreign residents.

From this digression I return with charts to illustrate the above mentioned components.

Total profits from current production currently at just above $2tn.

Below total profits from current production before and after taxes.

Out of the $1.5tn in after tax profits, 55% 57.5% is dividends and 45% 42.5% ($700bn $600bn) is saved.

It is also possible to calculate cash flow -- which is undistributed profits puls depreciation less (net) transfers. It is a measure of internal funds available for investment.

The national accounts also provide a measure of profits after tax without IVA and CCAdj. This is the measure often used in comparisons with the S&P measures of reported earnings. It ticked down in Q3 15 but the one-year trend is still up.

The highlights of the second GDP release for 3Q15 are in the link:

Indeed, 2Q 15 GDI growth was revised up from 0.7% to 2.2% qoq and Q3 15 GDI initial print was 3.1% qoq.

There is a lot of concern regarding inventory accumulation in the US. JPM, for instance, wrote that

"The mix of growth, however, is now less favorable for Q4 GDP, as real final sales were revised down from 3.0% to 2.7%, while inventory building was revised up from a $57 billion pace to an unsustainably hot $90 billion rate. The bigger inventory overhang helps explain why manufacturing sentiment remains cautious early in the fourth quarter, and does present downside risk to our 2.5% estimate for current-quarter GDP growth."

There are indeed reasons to be concerned about short-term quarter-on-quarter growth outcomes. I have looked at inventory-to-sales ratio in manufacturing, wholesale and retail sectors, and the big jump observed from late 2014 into 2015 in all the sectors seem to be mostly related to the energy sector. Of course there are sectors in which inventory level is too high and will need to be adjusted. Clothing is an example. But I think that translating that concern into a big worry for the US economy may not be appropriate.

Let's take a look at the total economy.

The chart below shows that inventory accumulation in the Q3 2015 was 0.6% of final sales, which is elevated by historical standards (at least when comparing to the period of the great moderation).

So it may be the case that the pace of inventory accumulation slows down in the coming quarters. Since it's the change in inventory accumulation that impacts growth, it might be the case that inventories remain a drag to growth in the coming quarters. Indeed, the slowdown of inventory accumulation in the third quarter was already enough to subtract 0.6pp from growth (better than the initially reported drag of 1.4pp). If the current flow of inventory accumulation goes to zero over a one-year period, this would result in a drag of 0.8pp to GDP growth.

However, the actual level of inventories (as opposed to the pace of inventory accumulation) does not seem particularly high. The ratio of inventories to final sales (nonfarm inventories) did increase from 2.14 at the end of 2014 to 2.18 in Q3 2015, but the overall picture seems to be of a flat inventory to final sales ratio in the aftermath of the financial crisis.

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US GDP increased 2% yoy in Q3.

Domestic demand (GDP excluding net exports and inventories) is growing at 2.8% yoy.

Private consumption rose 3.2% yoy - similar to the growth rate observed in the last 2 years.

Private investment slowed down to 3.4% yoy...

...but excluding the direct (accounting) impact of oil, investment is growing at 6% yoy.

Government consumption and investment turned positive in 2014.

Exports increased 2% on average in the last two years (and 1.5% yoy in Q3). The slowdown in export growth started in 2013, and precedes the strengthening of the dollar, which dates mid-2014.

Imports rose 4.8% on average in the last two years (5.5% yoy in Q3).

As a result of the slowdown in exports and strong imports, net exports became a drag to GDP growth, similar to what had happened from 2000 to 2006.

Looking at 5-year cycles, the strengthening of the broad dollar index (in real terms) suggests net exports will continue to be an accounting drag to growth.

At face value, this relationship suggests that, by late 2017, the 5-year average contribution of net exports to growth will be around - 0.4pp. Given the performance of the last 3 years, this would imply an average contribution of net exports of around -0.75 percentage points over the next couple of years.

The chart below shows that it is unusual for 2-year average contribution of net exports to GDP to be close to or lower than 0.75pp...

...and all those episodes of very negative net exports contribution were associated with very strong domestic demand.

A quick look at those episodes show that exports growth slowed down. In 1997-1999 period, for example, the US dollar was strengthening, US real exports were sideways, and imports were growing fast at the same time the US economy was very strong.

US GDP rose 1.5% in 3Q, close to bloomberg consensus. Consumption increased a healthy 3.2% (contributing 2.2 pp) and investment growing 2.9% (contributing 0.5pp). Domestic demand growth appears consistent with FOMC's description of "increasing at a solid rates in recent months".

Inventories were the main drag, cutting 1.4pp from growth in the quarter. The positive surprise was the flat contribution of net exports against an expected drag.

Inventory changes can be a key component of quarterly changes in growth, but they have not changed the overall trend. The charts below plot GDP and Final Sales (GDP less inventories) together with a trend since mid-2009 and a trend in the last two years.

Both GDP and Final Sales share the same 2.0% growth trend since the end of the recession and 2.5% growth trend in the last two years.

Important to highlight that current pace of growth appears to be above potential, therefore hinting that underutilization of labor resources would likely continue to diminish.