by Rick Davis
In their first estimate of the second quarter 2012 GDP, the Bureau of Economic Analysis (BEA) found that the annualized rate of U.S. domestic economic growth was 1.54%, down nearly a half percent from the (revised) 1.97% for the prior quarter and down over two and a half percent from the (revised) 4.10% growth rate for the 4th quarter of 2011. And as part of this data release the BEA revised data back through 2009 — revisions which generally moderated their view of both the recession and the subsequent recovery. (A table recapping those revisions is shown later in this article.)
The drop in the growth rate came primarily from a lower contributions from consumer goods spending and fixed investments. The ongoing contraction in government spending moderated, and inventory growth added about a third of a percent to the headline growth. The BEA’s bottom line of “real final sales of finished goods” had an annualized growth rate of 1.22%, down slightly more than a percent from the (revised) 2.36% growth rate for the prior quarter. In nearly all regards the published numbers show very weak growth for an economy that is now supposed to be over three years into a recovery.
We have previously been critical of the “deflaters” that the BEA has used to correct the “nominal” data into “real” numbers. For 2Q-2012 the BEA assumed annualized net aggregate inflation of 1.51% (compared to the revised 2.16% annualized rate assumed for the prior quarter). In contrast, during the second quarter the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) actually recorded mild deflation at a -0.84% annualized “inflation” rate — i.e., the CPI-U was considerably lower than the BEA’s deflater. If the CPI-U’s deflationary rate had been used to deflate the BEA’s raw “nominal” numbers, the reported growth rate for the economy would have been substantially better (at 3.91%) than the published headline rate.
And real per capita disposable income was reported to be growing at a 2.54% annualized rate during the quarter. Despite that welcome uptick, real per capita disposable income has grown (in total) a mere $5 per year during the past 5 quarters.
Among the notable items in the report:
— The contribution to the annualized growth rate from consumer expenditures for goods weakened substantially to 0.18%, (down from 1.11% in the prior quarter, and down even further (from 1.29%) since the fourth quarter of 2011).
— The contribution made by consumer services rose slightly to 0.87% (from 0.61%).
— The growth rate contribution from private fixed investments dropped to 0.76% (down from a revised 1.18% for the prior quarter).
— Inventory growth contributed 0.32% to the headline number, up significantly from the revised -0.39% contraction rate for the prior quarter. (This is a case where the noise from the revision of the prior quarter’s numbers swamps any viable signal in the current data — since we had previously been told that inventories grew during the prior quarter at essentially the same rate as now estimated for 2Q-2012.)
— The reported drag on GDP growth from contracting expenditures by governments lessened to -0.28% (from a revised -0.60% for the prior quarter). The bulk of the contraction has now shifted from Federal spending (-0.03%) to state and local spending (-0.26%).
— The annualized contribution to the growth rate from exports grew modestly to 0.73% (up from a revised 0.60% for the prior quarter).
— Imports are now reported to be removing -1.04% from the headline growth rate (substantially worse than the -0.54% drag during the prior quarter). The net of foreign trade is now reported to be pulling the total growth rate down by -0.31%.
— The annualized growth rate of “real final sales of domestic product” dropped to 1.22%, some 1.14% below a revised 2.36% for the first quarter. If this number is accepted at face value (and not as a consequence of “deflaters” playing havoc with inventory valuations) it indicates a somewhat weaker economy than is conveyed by the headline number.
— Real per-capita disposable income grew at an annualized 2.54% rate during the quarter (to $32,769 per year). Although this number improved by roughly $200 per capita per year during the quarter, it is now only $5 per year more than the number recorded during the 3rd quarter of 2010, some 5 quarters ago.
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. (Please note that nearly all of the numbers in this table have changed since our last report as a result of the BEA’s comprehensive revision of their data back through 2009.)
Quarterly Changes in % Contributions to GDP
Click on table for larger image.
From our perspective the most interesting data in the new release was contained in the revisions to previously published numbers — back through 2009. Some of the revisions to more recent data were surprising — for example, the 2nd and 4th quarters of 2011 were each revised upward by over a full percent, bringing the growth rate for the fourth quarter of 2011 up to an almost astonishing +4.1%. However, in general the revisions tended to moderate both the last quarters of the recession and the subsequent recovery:
BEA’s Changing View of US Economic Growth
Notable in the revisions shown above are the substantial downward revisions to the heart of the recovery during the first and second quarters of 2010 — where the growth rates are now over 1.5% weaker than previously reported. Furthermore, the BEA did not re-visit data for 2008 and earlier — even though their substantial revision of the first quarter of 2009 indicates that the underlying data has been changing even that far back.
Also note that the first quarter of 2011 has now been revised downward to a nearly complete economic stall — after the “real-time” prints from the BEA were reporting the growth rate to be around 1.9%. If indeed the history of revisions from the BEA indicate that the “real-time” reports are subject to some +/- 2% in revisions (with the especially critical “turning point” of the last recession (1Q-2008) having been revised downward by a full 2.8% after some 40 months had passed), then we’re not sure how much we can read into a currently published headline number for the 2nd quarter of 2012 — one that falls well below that revision rate.
Regardless of the hoopla over the revisions, we can take the following from the BEA’s latest view of the economy:
— The overall annualized growth rate is weakening. By any measure it is already far weaker than we might expect based on historical trends for the third year of a recovery.
— The consumer is not the driving force behind the recovery (such as it is). During the most recent quarter the growth in consumer spending for goods contributed only 0.18% to the headline number. And although real per capita disposable income did grow at a 2.54% annualized rate during the quarter, it has only just now recovered to the level recorded during the first quarter of 2011 — some 5 quarters ago.
— But perhaps the most interesting aspect of the report comes from a more political reading of the numbers. If the BEA had set out to engineer a report that would seem plausible while not triggering “doom and gloom” headlines in the mass media, this is exactly the kind of number they might choose. Anyone can create either “continued growth” or “weakening recovery” sound bites from the report — depending on your vested point of view. And meanwhile they have certainly not bitten their master’s hand.
— And (perhaps unfortunately from the market’s perspective) this report provides cover for the Federal Reserve to do nothing dramatic just prior to the Presidential election. A 1.54% annualized growth rate hardly justifies any heroics in any new round of QE monetary interventions — which could smack of pre-election tinkering from an ostensibly non-political entity.
We have previously observed that the first report for the third quarter of 2012 will be published on October 29th — some 5 days before the Presidential election. We would be truly amazed if the BEA reported any jarring new economic data at that time. If the economy is in fact contracting during the third quarter of 2012 (or contracted during the second quarter, for that matter), don’t expect the BEA to tell us until well after the polls have closed.