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The BEA’s Q2 GDP: A Deeper Analysis

Courtesy of Doug Short.

Note from dshort: Here is the always-fascinating analysis of the BEA’s latest GDP report from the Consumer Metrics Institute.

In their first estimate of the US GDP for the second quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a +3.94% annualized rate. When compared to the prior quarter, the new measurement is up over 6% from a -2.11% contraction rate for the 1st quarter of 2014 (which was itself revised upward +0.83% from a previously reported -2.94% contraction). This is the largest positive quarter to quarter improvement in GDP growth in some 14 years.

The largest contributions to the 2nd quarter 2014 +6% turnaround in the headline number were from inventories (+2.8%), exports (+2.5), consumer goods expenditures (+1.2%) and commercial fixed investments (+0.9%). Offsetting those positive quarter-to-quarter contribution changes were deteriorating imports (which weakened by -1.5%) and consumer expenditures for services (down -0.3% quarter-to-quarter).

Real annualized per-capita disposable income was reported to be $37,449 — up some $284 from the prior quarter (a 3.1% annualized growth rate) but still down $420 from the 4th quarter of 2012. A significant portion of that increased disposable income went into savings, with the savings rate growing to 5.3% — the highest savings level since 4Q-2012.

For this report the BEA effectively assumed annualized quarterly inflation of 2.00%. During the second quarter (i.e., from April through June) the growth rate of the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was over one and a half percent higher at a 3.53% (annualized) rate, and the price index reported by the Billion Prices Project (BPP — which arguably reflected the real experiences of American households) was three quarters of a percent higher at 2.72%. Under reported inflation will result in overly optimistic growth data, and if the BEA’s numbers were corrected for inflation using the BLS CPI-U the economy would be reported to be growing at a 2.49% annualized rate. If we were to use the BPP data to adjust for inflation, the first quarter’s growth rate would have been 3.30%.

Separately, the BEA released its annual revision to historical data (dating back to 1999). Average quarterly annualized growth in both 2011 and 2012 was reported to have been somewhat lower than previously reported (by about a third of a percent each year), while average quarterly annualized growth in 2013 was revised upward (by about a half percent).

Among the notable items in the report:

  • The contribution of consumer expenditures for goods to the headline number was 1.38% (up a substantial 1.15% from the 0.23% contribution now reported for the prior quarter).
  • The contribution made by consumer services spending dropped to 0.31% (down -0.29% from the 0.60% reported for the prior quarter).
  • Commercial private fixed investments provided 0.91% of the headline number (after adding only 0.03% during the prior quarter).
  • The prior quarter’s contraction in inventories reversed — adding 1.66% to the headline growth rate after subtracting -1.16% during the prior quarter.
  • Governmental spending grew, adding 0.30% to the headline after removing -0.15% in the prior quarter. All of that growth was at the state and local levels.
  • Exports are now reported to be adding 1.23% to the headline growth rate after subtracting -1.30% during the first quarter.
  • Imports subtracted -1.85% from the headline number after removing only -0.36% during the prior quarter.
  • The annualized growth rate for the “real final sales of domestic product” is reported to be 2.28% (after contracting at a revised -0.95% in the prior quarter). This is the BEA’s “bottom line” measurement of the economy, and it is lower than the headline number because of the growing inventories.
  • And as mentioned above, real per-capita annual disposable income grew by $284 during the quarter (a 3.09% annualized rate). But real disposable income is still down a material -$420 per year from the fourth quarter of 2012 (before the FICA rates normalized) and it is up only about 2% in total since the second quarter of 2008 — some 6 years ago.

The Numbers, With All Past Data Revised

As a quick reminder, the classic definition of the GDP can be summarized with the following equation:

GDP = private consumption + gross private investment
+ government spending + (exports – imports)

or, as it is commonly expressed in algebraic shorthand:

GDP = C + I + G + (X-M)

In the new report the values for that equation (total dollars, percentage of the total GDP, and contribution to the final percentage growth number) are as follows:

GDP Components Table

The quarter-to-quarter changes in the contributions that various components make to the overall GDP can be best understood from the table below, which breaks out the component contributions in more detail and over time. In the table below we have split the “C” component into goods and services, split the “I” component into fixed investment and inventories, separated exports from imports, added a line for the BEA’s “Real Final Sales of Domestic Product” and listed the quarters in columns with the most current to the left:

Quarterly Changes in % Contributions to GDP
Click to View
Click for a larger image

Summary and Commentary

At first glance this report shows an astonishing turnaround in the economy. It generally exceeded expectations and fully delivered on Ms. Yellen’s promise that “… Economic activity is rebounding … and will continue to expand at a moderate pace thereafter.” Apparently, after all, it really was just “bad weather.”

And the key measure of “real” per capita disposable income actually shows signs of measurable growth, managing a 3% annualized growth rate.

Plus the dreaded “annual revisions” were far less dramatic than we had come to expect. Although nearly all of the historic numbers changed, it was basically a zero net exercise — with weaker data for 2011 and 2012 mostly offset by stronger data for 2013.

But before we run out to celebrate, let’s look a few items that might argue for some caution:

  • An increased household savings rate absorbed about half of the improved disposable income. And less than 1% of the 6% turnaround in the headline rate was the result of greater consumer spending. Households are still reluctant to spend freely.
  • We have mentioned many times before that inventories are, over time, a zero-sum game. They are also highly volatile — because of both business cycle factors and the BEA’s inventory measurement and valuation methodologies. For that reason the BEA itself removes inventories from what it considers its “bottom line” — the “real final sales of domestic product.” By that measure the economy was growing at a much more modest 2.28% (even using really favorable assumptions about inflation).
  • The volatility in the BEA’s numbers is eroding trust: the official measurement of economic growth for the first quarter went from +0.11% to -0.99% to -2.94% over a span of just 56 days. Those reports contained material differences that called for drastically different economic plans and/or corporate responses. At best any of the BEA’s initial data lacks credibility. At worst it is a lame guesstimate that targets consensus expectations — making it arguably the least accurate and least timely among Western developed countries.
  • On “Main Street” the economy is most likely not growing at 4%, unemployment is certainly not roughly 6% by any realistic measure and the reported increase in average household incomes was likely skewed by the upper end. Median households understand all of this — hence the increased savings.
  • But if Ms. Yellen is either particularly gullible or desperately looking for a rationale to begin “normalizing” monetary policy, this report provides a far better read that what we saw just last month. An economy officially growing at 4% with roughly 6% unemployment would argue strongly for an end to QE and a return to historicly prevalent interest rates.

Unfortunately, this is yet another initial BEA report. We would recommend keeping the champagne on ice for at least the next 60 days.

© Rick Davis
Consumer Metrics InstituteTM
Home of Daily Consumer Leading Indicators

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