Consumer Spending is Driving Healthy Economic Growth

September 29th, 2017
in consumer metrics institute, gdp

by Rick Davis, Consumer Metrics Institute

September 28, 2017 - BEA Revises 2nd Quarter 2017 GDP Growth Slightly Upward to 3.06%:

In their third and final estimate of the US GDP for the second quarter of 2017, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +3.06% annual rate, up +0.02% from their previous estimate and up +1.82% from the prior quarter.

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The changes from the previous estimate are little more than statistical noise. For example, consumer spending was revised downward -0.03% to a +2.24% annualized growth rate. The inventory contribution continued to be essentially neutral (+0.12), while the previous growth in commercial fixed investment moderated slightly (to +0.53%). Governmental spending remained in a very minor contraction (-0.03%), and the growth rates for both exports (+0.42%) and imports (-0.22%) were fine tuned modestly.

The BEA's "bottom line" (their "Real Final Sales of Domestic Product", which excludes inventories) was revised downward to +2.94%, still up +0.24% from the prior quarter.

Real annualized household disposable income was revised upward $7 to $39,299 (in 2009 dollars). The household savings rate was revised upward by +0.1% to 3.8% (down -0.1% from the prior quarter).

For this revision the BEA assumed an effective annualized deflator of 1.01%. During the same quarter (April 2017 through June 2017) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was a minuscule 0.06%. 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 materially higher at a very healthy +4.04% annualized growth rate.

Among the notable items in the report :

  • The headline contribution from consumer expenditures for goods was reported to be +1.16% (up +1.01% from the prior quarter).
  • The contribution to the headline from consumer spending on services strengthened to +1.08% (although that remained down -0.09% from the prior quarter). The combined consumer contribution to the headline number was +2.24%, up +0.92% from 1Q-2017.
  • The headline contribution from commercial private fixed investments was revised downward to +0.53%, down a material -0.74% from the prior quarter. That continued to reflect a contraction in residential construction.
  • Inventory continued to be very nearly neutral (at +0.10%). This was a +1.58% improvement 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 was reported to be contracting very slightly, at a -0.03% rate. This was a +0.08% improvement from the prior quarter.
  • Exports contributed +0.42% to the headline number, down -0.43% from the prior quarter.
  • Imports deducted -0.22% from the headline, which was up +0.41% from the prior quarter. In aggregate, foreign trade added +0.20% to the headline number.
  • The "real final sales of domestic product" grew at an annualized 2.94%, up +0.24% from the prior quarter. This is the BEA's "bottom line" measurement of the economy and it excludes the inventory data.
  • As mentioned above, real per-capita annual disposable income was revised upward slightly (by $7 per annum). At the same time, the household savings rate was reported to have increased +0.1% (although it is down -0.1% from the prior quarter). It is important to keep this line item in perspective: real per-capita annual disposable income is up only +7.15% in aggregate since the second quarter of 2008 -- a meager annualized +0.77% growth rate over the past 36 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 :

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

There were no material revisions in this report -- merely statistical noise. The net result continues to show an economy in a state of healthy growth. The notable takeaways from this report are :

  • Consumer spending provided 2.24% to the headline number, more than two thirds of the total growth and 69% of the total GDP.
  • Commercial fixed investment was revised downward modestly to +0.53%, while there continued to be a contraction in residential construction.
  • Exports and Imports continue to provide a net positive (+0.20%) contribution to the headline number.

During the second quarter consumer spending was what might be considered "normal" for a healthy economy. Hopefully next month's preliminary reading for the third quarter continues that trend.

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