1Q GDP: Upward Revisions in Investments and Exports

June 28th, 2016
in consumer metrics institute, gdp

by Rick Davis, Consumer Metrics Institute

In their third and final estimate of the US GDP for the first quarter of 2016, the Bureau of Economic Analysis (BEA) revised the growth rate upward to +1.08%, up 0.26% from their previous estimate but still down -0.30% from from the +1.38% rate recorded for the fourth quarter of 2015. 


Follow up:

Much of upward revision came from improvements in commercial fixed investments, which were reported to have contracted at only a -0.06% annualized rate -- an improvement of +0.19% from the -0.25% previously reported, but still down slightly from the prior quarter's +0.06% growth rate. The other major improvement came from exports, which were reported to be showing a +0.04% annualize growth (up +0.29% from both the previous report and the prior quarter). 

Offsetting a portion of the above good news was a further downward revision to the annualized growth rate for consumer expenditures. Consumer spending on services was revised downward -0.21%, while consumer spending on goods was adjusted downward another -0.06%. In total, annualized consumer spending was reported to be down -0.64% from the prior quarter. 

The BEA's treatment of inventories can introduce noise and seriously distort the headline number over short terms -- which the BEA admits by also publishing a secondary headline that excludes the impact of inventories. The BEA's "bottom line" (their "Real Final Sales of Domestic Product") improved +0.29% to +1.31%, although that was still down -0.29% from the prior quarter. 

Annualized household disposable income was not revised materially in this revision. Real annualized per capita disposable income was reported to be $38,713 per annum, up $3 per year from the previous estimate. Meanwhile, the household savings rate increased yet again to 5.8%, the highest level since the fourth quarter of 2012. 

For this revision the BEA assumed an effective annualized deflator of 0.36%. During the same quarter (January 2016 through March 2016) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was mildly dis-inflationary at -0.20%. Over estimating inflation results in correspondingly pessimistic growth rates, and if the BEA's "nominal" data was deflated using CPI-U inflation information the headline growth number would be a significantly better +1.65%. 

Among the notable items in the report 

-- The headline contribution from consumer expenditures for goods declined slightly to a miniscule +0.03% growth (representing a -0.33% decline from the prior quarter). 

-- The contribution to the headline from consumer services was revised down further to +0.99% (down +0.31% from the fourth quarter). The combined consumer contribution to the headline number was +1.02%, down -0.64% (more than one-third) from 4Q-2015 -- which in turn was down one-fourth from 3Q-2015. This revision follows a pattern as the third consecutive quarter of materially weaker growth in consumer spending. 

-- The headline contribution from commercial private fixed investments remained negative at -0.06%, down -0.12% from the prior quarter. 

-- The contribution from inventories remained negative, subtracting -0.23% from the headline number. This was essentially flat from the -0.22% recorded in 4Q-2015. It bears repeating that the BEA's inventory numbers are exceptionally noisy, subject to significant distortions/anomalies caused by commodity price swings while representing a zero reverting (and long term zero sum) series. 

-- In this revision Governmental spending increased slightly, adding +0.23% to the headline. This growth was entirely due to increased capital spending at state and local levels, with Federal spending actually contracting -0.11%. 

-- The contribution to the headline number from exports turned positive at +0.04% (an improvement of +0.29 from the prior quarter). 

-- Imports added +0.08% to the headline number, down -0.03% from the somewhat greater growth reported for the prior quarter. 

-- The "real final sales of domestic product" improved +0.29% to +1.31%, although that was still down -0.29% from the prior quarter, and down -1.39% from 3Q-2015. This is the BEA's "bottom line" measurement of the economy and it excludes the reported inventory contraction. 

-- As mentioned above, real per-capita annual disposable income was essentially flat in this report, although the household savings rate increased yet again. It is important to keep this line item in perspective. Real per-capita annual disposable income is up only +5.55% in aggregate since the second quarter of 2008 -- a meager annualized +0.70% growth rate over the past 31 quarters. 

The Numbers, as 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

 Total GDP=C+I+G+(X-M)
Annual $ (trillions) $18.2 = $12.5 + $3.0 + $3.2 + $-0.5
% of GDP 100.0% = 68.6% + 16.6% + 17.6% + -2.7%
Contribution to GDP Growth % 1.08% = 1.02% + -0.29% + 0.23% + 0.12%

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 :


Summary and Commentary 

Although the BEA's report did break the 1% growth threshold, it still does not record a robustly growing economy. The minor upward revisions posted in this report were arguably not statistically significant. From a larger perspective the past three quarters continue to show a slow-motion slide towards economic stagnation. 

Recapping the key items in this report: 

-- Private commercial investment remains essentially flat. 

-- Consumer spending was reported (yet again) to be weaker. Non-discretionary spending on health care and housing provided most of the growth in consumer services spending. 

-- The above spending weakened even as per capita disposable income improved slightly. All increased disposable income was channeled into the household savings rate -- which now stands at 5.8%, the highest level since the fourth quarter of 2012. Clearly households are not so confident that they are freely spending whatever loose change they may have.

Next month we will have the first estimates of growth for the 2nd quarter of 2016, along with major revisions to all prior data. In the past those historic revisions have occasionally been substantial. For example, in 2011 and 2013 the revisions completely reshaped the severity and timing of the "Great Recession." Oddly enough, the BEA doesn't do major downward restatements of recent history during election years -- generally saving the really bad news for the "off" year revisions. 

But election years come with their own variety of economic havoc in the form of a couple of quarters of domestic political "fear, uncertainty and doubt" (FUD) -- which consistently hammer household confidence and spending growth during the third and fourth quarters of Presidential years. In that regard this year is shaping up to be epic.

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