by Rick Davis
In their third estimate of the first quarter 2012 GDP, the Bureau of Economic Analysis (BEA) left the annualized rate of U.S. domestic economic growth unchanged at 1.88%, which is still more than a percent below the growth rate for the fourth quarter of 2011. This revision to the prior month’s report does not reflect actual monthly changes in the economy, but rather another month’s improvement in the BEA’s understanding of what was happening during the prior quarter.
Even though the headline number stayed the same, the components of that number shifted somewhat: for example, the contribution provided by consumer spending (for both goods and services) dropped relative to the earlier reports, and commercial investment improved. However, the largest changes among the components in the headline came from foreign trade, where the impact of both exports and imports dropped significantly, but in largely offsetting manner. Furthermore, beneath those offsetting revisions was a recognition of a general weakening in nearly all areas of foreign trade (where the nominal value of exports dropped -.74% and imports dropped -1.15% from previous reports).
The other key take-away from the data revision is that the latest round of inventory building also seems to have finally run its course, with the net contribution of inventory growth to the headline number dropping to a mere 0.10% after boosting the headline for the fourth quarter of 2011 by nearly two percent. As a result of the drop in inventory growth the BEA’s bottom-line “real final sales” improved to an annualized growth rate of 1.78% (up from 1.16% in 4Q-2011).
We have previously been critical of the seemingly low “deflaters” that the BEA has used to correct the “nominal” data into “real” numbers (as a reminder, lower “deflaters” cause the reported “real” growth rates to increase). In this report the BEA revised those deflaters upward slightly, with net annualized inflation rate during 1Q-2012 now assumed to have been 2.01% (compared to the 1.65% assumed in the prior report). If the seasonally corrected CPI-U calculated by the Bureau of Labor Statistics (BLS) for the same time period had been used to deflate the raw “nominal” numbers the economy would have been reported to have been growing at an anemic 0.24% annualized rate.
And the revised real per capita disposable income was reported to be growing at a minuscule 0.02% annualized rate during the quarter — although even this essentially flat reading was an improvement over the contraction previously reported. We continue to find it unrealistic to expect any kind of sustained recovery throughout 2012 without meaningful increases in household disposable income.
Among the notable items in the report:
— The contribution to the annualized growth rate for consumer expenditures for goods weakened again to 1.35%, (down slightly from 1.44% in the prior report, and essentially flat from the 1.29% for the fourth quarter of 2011).
— The contribution made by consumer services also deteriorated (to 0.39%).
— The growth rate contribution from private fixed investments improved to 0.74% (up from 0.61% in the last report).
— But that number was nearly completely offset by a drop in the contribution made by inventories (now 0.10%, less than half of the 0.21% reported earlier). The relatively neutral reading on inventory growth could be a signal that the inventory growth cycle that provided nearly two-thirds of the fourth quarter’s rosy headline number has run its course after only two quarters — and producers have stopped stocking up in anticipation of growing demand.
— The reported drag on GDP growth from contracting expenditures by governments grew in this revision very slightly to -0.80%, essentially the same as the -0.84% reported for 4Q-2011. The contraction of Federal defense spending alone shrank the headline number by -0.46%, and state and local governments sucked another -0.32% from the headline number.
— The annualized contribution to the growth rate from exports dropped dramatically to 0.58% (down from 0.98% in the prior report).
— Imports are now reported to be removing -0.48% from the growth rate of the overall economy, but this is also a dramatic change from the -1.05% reported only 28 days ago. The net of foreign trade is now reported to be slightly positive for the headline number (adding 0.10% to the annualized GDP growth rate).
— The annualized growth rate of “real final sales of domestic product” rose to 1.78%, but it is still 1.38% below the +3.16% reported for the third quarter of 2011. This report’s improvement is largely the result of a continued weakening in the growth of inventories. If this number is accepted at face value (and not as a consequence of “deflaters” playing havoc with inventory valuations) it still indicates a weaker economy than is conveyed in the headline number.
— Real per-capita disposable income grew at an annualized 0.02% rate during the quarter (or roughly $2 per capita per year: from $32,572 per capita to $32,574 per capita) — and it still remains lower than it was during the 3rd quarter of 2010, some 5 quarters ago.
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
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 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 Finals Sales of Domestic Product” and listed the quarters in columns with the most current to the left:
Quarterly Changes in % Contributions to GDP
Although the headline number was unchanged, there were signals within the details that the economy is shifting in significant ways:
— The inventory growth cycle has likely begun to reverse, with producers sensing that inventories have grown more than enough to support disappointing levels of consumer spending. Historically such realizations come only after inventories have actually grown too large, causing subsequent quarterly production numbers to drop as inventories are drawn down to levels justified by actual sales.
— Federal defense spending is contracting fast enough to remove nearly half a percent from the GDP’s annualized growth rate. This is the flip side of the U.S. disengagement from Iraq, and it should at least continue as the disengagement spreads to other theaters of operation.
— In this revision the growth rates in foreign trade flattened substantially relative to the view held only a month earlier. In the BEA’s sequential estimating process the trade numbers are generally the last to firm up, and it is clear that the numbers finally came in far softer than the trade experts at the BEA had anticipated during the first two estimates. Although the nominal trade numbers are still increasing quarter-to-quarter, the actual rate of growth was only half of that previously projected — signalling that the global economy has been weaker than the BEA’s trade experts had expected.
— The now-weaker growth in consumer spending (such as it is) has not come from any material growth in per capita disposable income. It remains hard to see how an extra $2 per year per consumer is going to provide significant long term growth for this economy. Any reported consumer spending growth is neither organic nor long-term sustainable — and likely fueled by governmental student loans and household cash flows improved by re-financing or mortgage defaults (whether strategic or involuntary).
And finally, those inclined to cynicism might point out that this just happens to be exactly the kind of economic report we should expect from bureaucrats in Washington during the run-up to a Presidential election — i.e., unchanged headlines for 1Q-2012 with no significant “sound bites.” The long term academic veracity of the economists at the BEA may hinge only on whether they ultimately get the numbers “right” — and in the case of 1Q-2008 (the first real quarter of the “Great Recession” and exactly four years ago during the run-up to a Presidential election) even the slightest hint of the then-ongoing contraction (let alone the full extent of the contraction) wasn’t published until July 2009 — long after the 2008 polls had closed. And for that same reason we would be surprised if the upcoming July 27th revisions to historic GDP numbers result in any shocking revisions to recent data. Any such shocks can easily wait for next year’s revisions.