by Rick Davis
In their first revision to their 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 1.73%, up 0.19% from their initial estimate — but still down about a quarter of a percent from the 1.97% reported for the prior quarter and down over two and a quarter percent from the 4.10% growth rate for the 4th quarter of 2011. The changes in the GDP growth shown in this report do not represent actual month-to-month changes in the economy, but merely a refined understanding of the previously reported data for the second quarter.
The upward revisions in the growth rate came primarily from substantial improvements in trade, with plunging imports alone contributing a half percent to the new growth number. The contributions from exports and consumer expenditures on services also grew modestly, and the contraction rate for government expenditures also moderated. On the negative side, consumer spending on goods weakened slightly, as did commercial fixed investments. The biggest surprise in the report, however, came from the revisions to the inventory numbers — which last month were reported to be growing, but in this revision were reported to be shrinking — with a revised overall negative impact on the headline number of over a half percent. The BEA’s bottom line of “real final sales of finished goods” had an annualized growth rate of 1.96%, improved from the prior report but still down -0.40% from the 2.36% growth rate for the prior quarter.
The revisions do not materially change the picture of an economy that is growing — although at a pace that is substantially slower than we should expect over three years into a recovery.
For this set of revisions the BEA assumed annualized net aggregate inflation of 1.59% (compared to the 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. As a reminder: an understatement of assumed inflation improves the reported headline number, and conversely an overstatement shrinks the calculated growth rate — and in this case the BEA’s “deflater” actually substantially moderated the published headline rate.
And although real per capita disposable income was reported to be growing at a 2.38% annualized rate during the quarter, during the past 5 quarters real per capita disposable income has grown (in total) a mere $14 per year — hardly enough to ignite a real consumer-led recovery.
Among the notable items in the report:
— The contribution to the annualized growth rate from consumer expenditures for goods weakened further to 0.09% (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 to 1.11% (up a significant 0.24% from the initial estimate of 0.87%).
— The growth rate contribution from private fixed investments dropped to 0.63% (down from 0.76% in the previous report).
— The biggest revision was in reported changes to inventories. The previously reported growth from inventory building was revised sharply downward to a net draw-down of inventories — enough to contract the headline number by -0.23% (although this revised number was still up somewhat from the revised -0.39% contraction rate for the prior quarter).
— The reported drag on GDP growth from contracting expenditures by governments lessened further to -0.18% (down from the initial figure of -0.28% in the previous estimate). The vast bulk of the contraction has now shifted from Federal spending (-0.01%) to state and local spending (-0.17%).
— The annualized contribution to the growth rate from exports was revised upward to 0.82%.
— Imports are now reported to be removing only -0.51% from the headline growth rate (substantially better than the -1.04% drag previously reported). The net of foreign trade is now reported to adding 0.31% to the headline number.
— The annualized growth rate of “real final sales of domestic product” was revised upward to 1.96%, still 0.40% below the 2.36% reported for the first quarter.
— Real per-capita disposable income grew at an annualized 2.38% rate during the quarter (to $32,778 per year — up only $14 per year from the $32,764 reported for the 1st quarter of 2011, 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
There is nothing material in this revision, just as the report itself shows no material change in the state of the economy. In fact (should we be sufficiently skeptical) this is exactly the kind of non-material report we should expect from a politically sensitive bureaucracy at this stage of an electoral cycle. We might, however, take at least the following from the BEA’s latest revision:
— Consumer spending on goods has gone completely into neutral, after providing modest growth as recently as the fourth quarter of 2011.
— Government spending is no longer a major drag on the economy. In fact, the period of Federal fiscal contraction seems to have nearly come to an end. Old habits may be tougher to kick than we might have hoped.
— The swing in inventories was certainly a surprise. What was previously reported as a quarter of inventory building is now reported to be a quarter when inventories were being drawn down. (We suspect that aberrant deflaters or seasonal adjustments may be at work here, but we would also note that inventories seem to be historically among the last pieces of BEA data to settle for any given quarter.) But if inventories are in fact being drawn down, it tells us that merchants and manufacturers are substantially more cautious about the coming quarters than the bullish equity markets would suggest.
— And lastly this report continues to provides a rationale should the Federal Reserve wish to avoid doing anything dramatic just prior to the Presidential election. A 1.73% annualized growth rate is sort of a Goldilocks rate (not too hot, not too cold) — hardly justifying any heroics in the form of a new round of QE monetary interventions while simultaneously discouraging any loose talk about a quickening recovery.
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 utterly amazed if the BEA reported any jarring new economic data at that time — and we suspect that they are likely to remain in an economic reporting “status quo” mode until well after the polls have closed.
© 2012 The Consumer metrics Institute, Inc.
Analysis articles by Rick Davis