by Rick Davis, Consumer Metrics Institute
In their third (and “final“) estimate of the US GDP for the third quarter of 2012 the Bureau of Economic Analysis (BEA) found that the economy was growing at a 3.09% annualized rate, an upward revision of +0.42% from the previously published estimate for that quarter and 1.83% better than the second quarter of 2012.
The improved headline number came primarily from substantial upward revisions to exports, consumer services and government expenditures, and a decrease in imports. Minor upward revisions in consumer goods and fixed investments was offset by a downward revision to inventories. The annualized growth rate for the BEA’s bottom line “real final sales of domestic product” was also revised up significantly to 2.36%.
Perhaps most surprisingly, for the first time since the fourth quarter of 2009 real state and local government expenditures are now reported to be growing. In fact, surging governmental expenditures at all levels contributed +0.75% to the headline number – with nominal defense spending alone growing at an astounding annualized 13.9% rate.
For this set of revisions the BEA assumed annualized net aggregate inflation of 2.74%. In contrast, during the third quarter the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) recorded a substantially higher 4.98% annualized inflation rate. As a reminder: an understatement of assumed inflation improves the reported headline number – and in this case the BEA’s low “deflater” (more than 2% below the CPI-U) significantly boosted the published headline rate. If the CPI-U had been used to convert the “nominal” GDP numbers into “real” numbers, the reported headline growth rate would have been a much weaker 0.93%.
And the contraction rate for real per capita disposable income is now reported to have moderated slightly (although it is still reported to be contracting at a -0.24% annualized rate). During the past 6 quarters (18 months) real per capita disposable income has shrunk by $73 per year – with $20 of that loss occurring during the past quarter. Once again the combination of increasing consumer expenditures coupled with shrinking disposable income raises concerns about the sustainability of the current recovery.
Among the notable items in the report:
- The contribution of consumer expenditures for goods to the headline number was revised upward to 0.85% (from 0.83% in the previous report).
- The contribution made by consumer services increased to 0.26% – up from the 0.16% in the previous report.
- The growth rate contribution from private fixed investments was largely unchanged at 0.12% (up slightly from 0.10% in the prior report).
- The contribution from inventories remained relatively high (+0.73%), providing about a quarter of the headline number. Over time inventory growth should be a nearly zero-sum game, and presumably this quarter’s growth from inventory building will be offset in future quarters by reduced production to shrink excessive inventories.
- From a long term perspective, the biggest change in the third quarter’s economy came from sharply increasing governmental expenditures. Growth in government spending at all levels is now reported to have added +0.75% to the headline number after subtracting -0.60% as recently as the first quarter of 2012.
- Exports added more than a quarter of a percent to the headline number (+0.27%). The improving export picture seems to imply an improving global economy despite any number of reports to the contrary.
- And reduced imports actually added +0.11% to the headline growth rate (a change in direction from the -0.02% previously reported).
- The annualized growth rate of “real final sales of domestic product” was revised sharply upward to 2.36%, some 0.46% above the prior report and now at the same level as reported for the first quarter of 2012.
- Real per-capita disposable income was down $20 during the quarter (to $32,691 per year). This is down $73 from the $32,764 reported for the 1st quarter of 2011, now some 6 quarters ago. The reported annualized contraction rate of -0.24% benefits from the relatively low deflaters used by the BEA. If per-capita disposable income were “deflated” using the BLS CPI-U (which presumably is what consumers actually experience when spending their incomes) the annualized contraction rate for per capita consumer spending power is more like -3.65%.
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:
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:
Nearly all of the detail in this revised report showed some improvement from the prior estimate. And the roughly 3% headline growth rate is well within the range of what we should be expecting some 13 quarters into an economic “recovery.” However, removing the impact of the governmental spending surge, growing inventories and foreign trade removes over three-fifths of the apparent growth.
Recapping the issues that merit caution moving forward:
- About a quarter of the headline growth rate came from a surge in governmental spending.
- Inventory growth also contributed about a quarter of the headline growth rate. The BEA’s inventory valuations are notoriously dependent on the deflators used, and the wild fluctuation of these numbers from earlier reports raises at least some concerns about their credibility. But even assuming that the reported numbers are correct, substantial growth in current inventories does not bode well for factory production schedules in future quarters.
- The continued contraction of per-capita disposable income means that households are under sustained pressure. Any growth in consumer spending is not coming from fatter paychecks – it is coming instead from other sources, including refinancing, strategic defaults, reduced personal savings (which now reportedly shrank by $25.9 billion during the quarter) and increased student loans.