Written by Rick Davis, Consumer Metrics Institute
In their third and final estimate of the US GDP for the fourth quarter of 2020, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +4.32% annual rate, up 0.23 percentage points (pp) from their previous estimate and down -29.12pp from the prior quarter.
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The 0.23pp positive revision in the headline number was provided by an upward 0.26pp revision in inventories. This BEA revision showed that the contraction in consumer spending on goods was somewhat worse than previously reported, but that change was mostly offset by an upward revision to spending on services. None of the other line item revisions was material.
In an earlier release, annualized household disposable income was revised $7 lower than in the previous report, and the household savings rate was reported to be 13.0%, unchanged from the previous report.
For this estimate the BEA assumed an effective annualized deflator of 1.87%. During the same quarter the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was higher at 2.19%. Under estimating inflation results in optimistic growth rates, and if the BEA’s nominal data was deflated using CPI-U inflation information the headline growth number would have been 4.09%.
Among the notable items in the report :
- Consumer spending for goods was reported to be contracting at a -0.32% rate, down -0.12pp from the previous estimate and down -9.87pp from the prior quarter.
- The contribution to the headline from consumer spending on services was reported to be 1.90%, up 0.10pp from the previous report and down -13.99pp from the prior quarter. The combined consumer contribution to the headline number was 1.58%, down -0.02pp from the previous report.
- The headline contribution for commercial/private fixed investments was revised to 3.04%, down -0.08pp from the previous report and down -2.35pp from the prior quarter.
- Inventories added 1.37% to the headline number, up 0.26pp from the previous report and down -5.20pp from the prior quarter. It is important to remember that the BEA’s inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity pricing or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.
- The contribution to the headline from governmental spending was revised to -0.14%, up 0.05pp from the previous report and up 0.61pp from the prior quarter.
- The contribution from exports was revised to 2.04%, up 0.04pp from the previous report and down -2.85pp from the prior quarter.
- Imports subtracted -3.57% annualized ‘growth’ from the headline number, down -0.02pp from the previous report and up 4.53pp from the prior quarter. Foreign trade contributed a net -1.53pp to the headline number.
- The annualized growth in the ‘real final sales of domestic product’ was revised to 2.95%, down -0.03pp from the previous report and down -23.92pp from the prior quarter. This is the BEA’s ‘bottom line’ measurement of the economy (and it excludes the inventory data).
- As mentioned above, real per-capita annualized disposable income was revised $7 lower than in the previous estimate. The annualized household savings rate was 13.0% (unchanged from the previous report). In the 50 quarters since 2Q-2008 the cumulative annualized growth rate for real per-capita disposable income has been 1.51%.
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 below 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 Final Sales of Domestic Product” and listed the quarters in columns with the most current to the left :
Summary and Commentary
The key points of this report can be summarized as follows:
- Consumer spending on goods continues to contract, while spending on services continues a slow recovery from the horrendous 2Q-2020 numbers. Household savings rates indicate that consumers remained wary during the 4th quarter.
- The positive headline is provided by growth in commercial fixed investments and inventories.
Under normal economic circumstances a report like this would be cause for — if not celebration — at least some smug sense of contentment. However, these are times of significant economic displacements, and normalcy is at least a few quarters away.
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