Inventories and Low Deflator Boost Low GDP Estimate
BEA Estimates 4th Quarter 2016 GDP at 1.87%
by Rick Davis, Consumer Metrics Institute
In their first (preliminary) estimate of the US GDP for the fourth quarter of 2016, the Bureau of Economic Analysis (BEA) reported that the US economic growth rate was +1.87%, down by nearly half (-1.66%) from the prior quarter.
The quarter to quarter decline in the headline growth rate came from a number of sources: the growth of consumer spending on services was more than halved (down -0.68%), exports went into contraction (off a dramatic -1.69%) and imports were down yet another -0.86%. Partially offsetting those declines were upticks in consumer spending on goods (up +0.34%), and increases in the growth rate for commercial fixed investment (+0.65%) and inventories (+0.51%).
The BEA's "bottom line" (their "Real Final Sales of Domestic Product", which excludes the growing inventories) recorded a sub 1% growth rate (+0.87%), down over 2% (-2.17%) from 3Q-2016.
Real annualized household disposable income was reported to have grown by $177 quarter-to-quarter, to an annualized $39,405 (in 2009 dollars). The household savings rate decreased by -0.2% to 5.6%.
For the fourth quarter the BEA assumed an effective annualized deflator of 2.12%. During the same quarter (October 2016 through December 2016) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was 3.41%. Under estimating inflation results in correspondingly over optimistic growth rates, and if the BEA's "nominal" data was deflated using CPI-U inflation information the headline growth number would have been much lower, at a +0.62% annualized growth rate.
Among the notable items in the report :
- The headline contribution from consumer expenditures for goods increased to a +1.11% growth rate (up +0.34% from the prior quarter).
- The contribution to the headline from consumer spending on services declined to +0.58% (down -0.68% from the prior quarter). Most of the decline appeared in spending for housing and utilities. The combined consumer contribution to the headline number was +1.69%, down -0.34% from 3Q-2016.
- The headline contribution from commercial private fixed investments was +0.67%, up +0.65 from an essentially flat prior quarter. That growth is about equally split between residential and commercial construction.
- The contribution from inventories was +1.00%, more than double the +0.49% growth rate recorded during 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.
- The positive headline contribution from governmental spending improved by +0.07% to +0.21%. The entirety of this increase was in state and local capital expenditures, with Federal expenditures contracting (-0.08%, as expected) as they "gave back" the fiscal year-end spending previously moved forward -- a recurring annual phenomenon that artificially boosts pre-election economic reports.
- Exports crashed into contraction (-0.53%) quarter-to-quarter, down -1.69% from the prior quarter.
- Imports subtracted yet another -1.17% from the headline number, down -0.86% from the prior quarter.
- The "real final sales of domestic product" was a relatively weak +0.87%, down over 2% (-2.17%) 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 $177 quarter-to-quarter. At the same time the household savings rate declined yet another -0.2% to 5.6%, now some -0.3% lower than the level recorded in the second quarter of 2016. It is important to keep this line item in perspective: real per-capita annual disposable income is up only +7.44% in aggregate since the second quarter of 2008 -- a meager annualized +0.85% growth rate over the past 34 quarters.
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
In their prior report that covered the pre-election economy, the BEA told us that the US GDP was growing at a 3.53% annualized rate -- a "happy days are here again" kind of number. Now we are told that during the fourth quarter those happy numbers were essentially halved. And even that headline may have been optimistic:
- The BEA's own "bottom line" final sales growth rate dropped over 2% and was below 1% (+0.87%) -- once rapidly growing inventories were factored out.
- The inflation neutralizing deflator they used (+2.12%) was materially below the inflation rate recorded by the BEA's sister agency, the Bureau of Labor Statistics (+3.41%). Using the BLS data to deflate the numbers also results in a sub 1% growth rate (+0.62%).
- We can expect the trade numbers to change materially in the next two monthly revisions.
As we mentioned last month, December's 3.5% third quarter growth rate was truly impressive. January's fourth quarter 1.9% is just "kind of, sort of" OK. And the BEA's "bottom line" sub 1% growth rate is somewhat less than OK. It will be interesting to see just how this headline holds up in the upcoming revisions.