The Consumer Saves 4Q 2016 GDP
March 30th, 2017
March 30, 2017 - BEA Revision Revises 4th Quarter 2016 GDP Growth Upward To 2.08%
In their third and final estimate of the US GDP for the fourth quarter of 2016, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +2.08% annual rate, up slightly from the +1.85% previously reported but down by -1.45% from the prior quarter.
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The improvement in the reported growth came primarily from increased consumer spending on services, with smaller increases in consumer goods spending and inventories also boosting the headline number. Offsetting those increases were continued weakening in commercial fixed investment, governmental spending and foreign trade.
The BEA's "bottom line" (their "Real Final Sales of Domestic Product", which excludes the growing inventories) grew slightly to +1.07%, although it remained down nearly 2% (-1.97%) from 3Q-2016.
Real annualized household disposable income was reported to have grown by $123 quarter-to-quarter, to an annualized $39,477 (in 2009 dollars). The household savings rate weakened slightly to 5.5%.
For the fourth quarter the BEA assumed an effective annualized deflator of 2.10%. 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 3.05%. 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 at a +1.17% annualized growth rate.
Among the notable items in the report :
- The headline contribution from consumer expenditures for goods was revised upward to a +1.29% growth rate (up +0.06% from the previous report and +0.52% from the prior quarter).
- The contribution to the headline from consumer spending on services was revised upward to +1.11% (up +0.30% from the previous report but still down -0.15% from the prior quarter). The combined consumer contribution to the headline number was +2.40%, up +0.37 from 3Q-2016.
- The headline contribution from commercial private fixed investments was reported to be +0.46%, down -0.05% from the previous report but up +0.44 from the prior quarter. That growth is about equally split between residential and commercial construction.
- The contribution from inventories was revised upward by +0.07% to +1.01%, which was 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 headline contribution from governmental spending was halved to +0.03%, roughly a fifth of the growth rate from the prior quarter. The entirety of this quarter-to-quarter growth was accounted for by state and local capital expenditures.
- Exports weakened further and remained in contraction at -0.55%, down -1.71% from the prior quarter.
- Imports subtracted another -1.27% from the headline number, down -0.96% from the prior quarter. In aggregate, foreign trade subtracted -1.82% from the headline number (a -2.67% change from the prior quarter).
- The "real final sales of domestic product" remained relatively weak at +1.07%, down nearly 2% (-1.97%) 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 $123 quarter-to-quarter. At the same time the household savings rate weakened slightly to 5.5%, some -0.6% 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 +7.63% in aggregate since the second quarter of 2008 -- a meager annualized +0.87% growth rate over the past 34 quarters.
The Numbers, as Revised
As a quick reminder, the classic definition of the GDP can be summarized with the following equation :
or, as it is commonly expressed in algebraic shorthand:
= 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
This revision continued the trend of a "not great, but on the other hand not really bad" headline. The primary source of the growth also continued to shift from commercial investments to consumers. Notable in the report were the following:
- In the prior quarter the BEA reported that the US GDP was growing at a 3.53% annualized rate. Now that growth has dropped by -1.45%.
- The BEA's "bottom line" final sales growth rate dropped quarter-to-quarter by nearly -2%.
- Foreign trade continues to crash, with no particular relief in sight.
- The inflation neutralizing deflator the BEA used (+2.10%) was materially below the inflation rate recorded by the BEA's sister agency, the Bureau of Labor Statistics (+3.05%). Using the BLS data to deflate the numbers results in a 1.17% growth rate.
For the moment this closes the BEA's book on the fourth quarter of 2016. A roughly 2% growth rate is certainly acceptable, but it is not the sort of growth rate that normally generates delirious optimism in the equity markets. Next month we should begin to find out how much of that optimism is economically warranted.