Trade and Increased Commercial Investment Saved Q1 2017 GDP from Contraction

April 28th, 2017
in aa syndication, gdp

April 28, 2017 - BEA Estimates 1st Quarter 2017 GDP Growth At 0.69%:

by Rick Davis, Consumer Metrics Institute

In their first (preliminary) estimate of the US GDP for the first quarter of 2017, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +0.69% annual rate, down roughly two thirds (-1.39%) from the +2.08% reported for the prior quarter.

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Total consumer spending grew at a meager +0.23% annualized rate during the quarter, down a significant -2.17% from the prior quarter. Inventory contraction removed another -0.93% from the headline number, a swing of -1.94% from the prior quarter. Government spending contracted during the quarter, removing -0.30% from the headline.

The good news was that commercial fixed investment added +1.62 to the headline, the strongest contribution since 1Q-2012 -- five years ago. And foreign trade also improved markedly to an essentially neutral contribution (+0.07%), up some +1.89% from the prior quarter.

The BEA's "bottom line" (their "Real Final Sales of Domestic Product", which excludes the growing inventories) was nearly a full percent better than the headline at +1.62%, up +0.55% from the 1.07% rate recorded 4Q-2016.

Real annualized household disposable income was reported to have grown only $42 quarter-to-quarter, to an annualized $39,519 (in 2009 dollars). The household savings rate grew slightly to 5.7%. The slow disposable income growth and the increased savings rate in large part explain the softened growth in consumer spending.

For the fourth quarter the BEA assumed an effective annualized deflator of 2.25%. During the same quarter (January 2017 through March 2017) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was lower at 1.54%. Over estimating inflation results in pessimistic growth rates, and if the BEA's "nominal" data was deflated using CPI-U inflation information the headline growth number would have been somewhat higher at a +1.41% annualized growth rate.

Among the notable items in the report :

  • The headline contribution from consumer expenditures for goods was a miniscule +0.02% growth rate (down -1.27% from the prior quarter).
  • The contribution to the headline from consumer spending on services was +0.21% (down -0.90% from the prior quarter), and the vast majority of the remaining increase was from greater healthcare spending. The combined consumer contribution to the headline number was +0.23%, down -2.17% from 4Q-2016.
  • The headline contribution from commercial private fixed investments was reported to be +1.62%, up 1.16% from the prior quarter. That growth was mostly from non-residential construction.
  • Inventory contraction deducted -0.93% from the headline number, down -1.94% from the prior quarter. It is important to remember that the BEA's inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity price or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.
  • Governmental spending contracted, removing -0.30% from the headline number (down -0.33% from the prior quarter). The contraction was nearly equally split between Federal and state/local spending.
  • Exports strengthened significantly quarter-to-quarter, swinging to +0.68% growth after contracting -0.55% in the prior quarter.
  • Imports subtracted -0.61% from the headline number, up +0.66% from the prior quarter. In aggregate, foreign trade added +0.07% to the headline number after subtracting -1.82% during the prior quarter.
  • The "real final sales of domestic product" grew at an annualized +1.62%, up +0.55% from the prior quarter. This is the BEA's "bottom line" measurement of the economy and it excludes the reported inventory growth.
  • As mentioned above, real per-capita annual disposable income was reported to have grown by only $42 quarter-to-quarter. At the same time the household savings rate increased to 5.7%. It is important to keep this line item in perspective: real per-capita annual disposable income is up only +7.75% in aggregate since the second quarter of 2008 -- a meager annualized +0.86% growth rate over the past 35 quarters.

The Numbers
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

Summary and Commentary
This report records a significant weakening in the growth of consumer spending, while commercial investment and foreign trade improved. The notable takeaways from the report are:

  • The consumer spending growth that remains can be accounted for entirely by increased healthcare costs.
  • Inventories contracted, arguably in anticipation of softer consumer spending.
  • Foreign trade reversed direction and for a change was not a drag on the headline number.
  • Commercial fixed investment was the strongest in five years.

The US economy is consumer driven; and for the moment that engine of growth has shifted into neutral. Wall Street euphoria notwithstanding, until disposable income shows significant signs of improvement, neutral may be the best that we can expect.

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