by Rick Davis, Consumer Metrics Institute
In their third estimate of the US GDP for the fourth quarter of 2012 the Bureau of Economic Analysis (BEA) reported that the economy was growing at a 0.38% annualized rate, roughly 2.7% worse than the 3.09% growth rate that they recorded for the prior quarter. The new number is 0.24% higher than the previously published estimate for the fourth quarter, but as such it merely represents an improved understanding of historic 4th quarter 2012 economic data and not improved month-to-month economic activity.
Although the headline number shows both an upward revision and positive growth, the 0.38% number remains not statistically distinguishable from a stalled economy. The positive revisions came primarily from fixed investments, with “less negative” exports providing an additional boost. Consumer activities were marginally weaker than previously reported, and governmental spending continued to shrink.
For this set of revisions the BEA assumed annualized net aggregate inflation of 0.97%. In contrast, during the third quarter the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) recorded a dis-inflationary -0.75% annualized “inflation” rate. As a reminder: an overstatement of assumed inflation decreases the reported headline number – and in this case the BEA’s relatively high “deflater” (more than 1% above the CPI-U) hurt 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 1.51% growth rate. If data for online prices from the Billion Prices Project had been used to deflate the BEA’s nominal data, the growth rate would have been 1.35% annualized.
And the previously reported improvements in real per capita disposable income were essentially sustained, with the annualized growth rate for per capita disposable income now reported to be a still healthy +5.36%. It should be noted that more than half of this increase in disposable income was offset by increased personal savings (up about $131 billion per year, or roughly 1% of GDP) as households remained cautious in their spending habits in anticipation of the fully restored FICA deductions that will take back most of the fourth quarter’s net disposable household cash gain during 1Q-2013.
Among the notable items in the report:
- The contribution of consumer expenditures for goods to the headline number was revised downward slightly to 1.02% (from 1.03% in the previous estimate).
- The contribution made by consumer services dropped by over a third to 0.27% (down from 0.44% previously reported).
- The growth rate contribution from private fixed investments was up sharply to 1.69% (from 1.36% in the previous report), providing essentially all of the upward movement in the headline number.
- Inventory draw-downs moderated slightly, removing -1.52% from the headline number (-1.55% previously). Since the inventory data in the BEA’s reports are often impacted significantly by not-fully-compensated commodity price changes, it is difficult to tease out of these numbers the true source of any changes (e.g., uncorrected oil pricing anomalies or genuine changes to supply chain stocks and/or manufacturing schedules).
- The previously reported sharp contraction in government spending became even slightly more negative, removing -1.41% from the headline number.
- Declining exports removed -0.40% from the headline number (an improvement, however, of +0.15% from the -0.55% negative contribution previously reported). The net drag from exports continues to be consistent with a generally weakening global economy, and is a trend we might expect to have been continuing in the current quarter.
- And reduced imports actually added +0.73% to the headline growth rate (down slightly from the 0.79% in the previous report). Again, this shows as a positive component in the GDP equation even though weakening demand for imports is often actually a sign of a slowing economy.
- The annualized growth rate of “real final sales of domestic product” was revised upward to 1.90%, still some -0.46% below the prior quarter. This is the BEA’s “bottom line” measurement of the economy.
- And real per-capita disposable income was revised downward a net $35 to $33,138 per year (although that revised number is still about $430 per year above the numbers published for 3Q-2012.) From an economic standpoint however, a significant share of that was absorbed when the personal savings rate soared from 3.6% to 4.7%, pulling $365 of that annual improvement into savings or deleveraging activities instead of consumptive spending.
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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:
Click to enlarge
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Despite the modest growth reported in this release, there remain reasons to be cautious about the economy:
- Even as revised this data represents an economy that is growing at a rate some 2.7% less than during the prior quarter (the greatest downward quarter-to-quarter change since the fourth quarter of 2008).
- As we have mentioned before, 4Q-2012 may be the quarter that in retrospect will be viewed as the last gasp of the “Great Recovery” – before there were significant economic headwinds created by reductions in consumer take-home pay, rising gas prices and accelerating contractions in global trade. If all other components of the economy stay the same, those factors alone could remove well over 2% from real-time economic “growth” by the end of the first quarter of 2013: the normalization of FICA deductions alone could reduce consumer spending enough to pull the headline number down by 1%, the $.50 per gallon increase in gas prices could similarly remove another 0.5% from the headline number, and weakening exports could easily reduce the headline number by another 1%.
- And lastly, this third estimate had only one significant revision – the upward restatement of fixed investments, which numerically provides more than the entire boost to the headline number. And all of that revision was in non-residential construction – i.e., commercial real estate, which has grown back to its highest “real” level of activity since the second quarter of 2009.
Judging from that number alone someone might conclude that there is a shortage of vacant office and retail space in the US. On the other hand, we might just be seeing the first tangible signs of a ZIRP (zero interest rate policy) induced “mis-allocation of capital.” Presumably there are people who are really good at building commercial structures (whether they are really needed or not), and apparently they have access to essentially free money. We have recently seen how that same scenario has played out in China, where empty shopping centers and empty cities have become too obvious to ignore.
We have wondered before if we are experiencing the Japanization of the US economy. Maybe commercial real estate is instead heading towards China.