Consumer Spending Increase Saves 4Q 2016 GDP Estimate from a Decline

by Rick Davis, Consumer Metrics Institute

February 28, 2017 – BEA Revision Revises 4th Quarter 2016 GDP Growth To 1.85%:

In their second estimate of the US GDP for the fourth quarter of 2016, the Bureau of Economic Analysis (BEA) reported that the US economic growth rate was +1.85%, essentially unchanged from the +1.87% previously reported but down by nearly half (-1.68%) from the prior quarter.

Although there was no material change in the headline number, the composition of that number was revised in several ways. Consumer spending on goods and services was revised upward by an aggregate of +0.35%. Meanwhile fixed commercial investment, inventories and governmental spending were revised in aggregate downward by -0.37% — completely offsetting the consumer gains.

The BEA’s “bottom line” (their “Real Final Sales of Domestic Product”, which excludes the growing inventories) continues to record a sub 1% growth rate (+0.91%), down over 2% (-2.13%) from 3Q-2016.

Real annualized household disposable income was reported to have grown by $127 quarter-to-quarter, to an annualized $39,481 (in 2009 dollars). The household savings rate was unchanged at 5.6%.

For the fourth quarter the BEA assumed an effective annualized deflator of 2.03%. During the same quarter (October 2016 through December 2016) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was 3.05%. Under estimating inflation results in correspondingly over optimistic growth rates, and if the BEA’s “nominal” data was deflated using CPI-U inflation information the headline growth number would have been below 1%, at a +0.87% annualized growth rate.

Among the notable items in the report :

• The headline contribution from consumer expenditures for goods was revised upward to a +1.23% growth rate (up +0.12% from the previous report and +0.46% from the prior quarter).
• The contribution to the headline from consumer spending on services was revised upward to +0.81% (up +0.23% from the previous report but still down -0.45% from the prior quarter). The combined consumer contribution to the headline number was +2.04%, essentially unchanged from 3Q-2016.
• The headline contribution from commercial private fixed investments was reported to be +0.51%, down -0.16% from the previous report but up +0.49 from the prior quarter. That growth is about equally split between residential and commercial construction.
• The contribution from inventories was revised downward by -0.06% to +0.94%, which was still nearly double the +0.49% growth rate recorded during 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 price or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.
• The previous positive headline contribution from governmental spending was revised downward by -0.15% to +0.06%, less than a third of the number in the previous report. The entirety of this revision and the remaining quarter-to-quarter growth was accounted for by state and local capital expenditures.
• Exports remained in contraction at -0.50%, down -1.66% from the prior quarter.
• Imports subtracted another -1.20% from the headline number, down -0.89% from the prior quarter. In aggregate, foreign trade subtracted -1.70% from the headline number.
• The “real final sales of domestic product” remained essentially unchanged at a relatively weak +0.91%, down over 2% (-2.13%) from the prior quarter. This is the BEA’s “bottom line” measurement of the economy and it excludes the reported inventory growth.
• As mentioned above, real per-capita annual disposable income was reported to have grown by $127 quarter-to-quarter. At the same time the household savings rate remained unchanged at 5.6%, some -0.3% lower than the level recorded in the second quarter of 2016. It is important to keep this line item in perspective: real per-capita annual disposable income is up only +7.65% in aggregate since the second quarter of 2008 — a meager annualized +0.87% growth rate over the past 34 quarters.

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

This revision was material only because the source components of the “not great, but on the other hand not really bad” headline were shifted in a zero-sum way from commercial investments and governmental expenditures to consumers. Notable in the report were the following:

• In the prior quarter (covering the pre-election economy), the BEA reported that the US GDP was growing at a 3.53% annualized rate. Now that growth has been essentially halved.
• The BEA’s own “bottom line” final sales growth rate dropped over 2% and was below 1% (+0.91%) — once growing inventories were factored out.
• The inflation neutralizing deflator they used (+2.03%) was materially below the inflation rate recorded by the BEA’s sister agency, the Bureau of Labor Statistics (+3.05%). Using the BLS data to deflate the numbers also results in a sub 1% growth rate (+0.87%).

As we mentioned last month, the fourth quarter was just “kind of, sort of” OK. Meanwhile, the BEA’s “bottom line” sub 1% growth rate is somewhat less than OK. It will be interesting to see just how this headline holds up in the upcoming revisions.