‘Strong’ GDP Growth Is Really Not So Strong

by Rick Davis, Consumer Metrics Institute

In their first (or “preliminary”) estimate of the US GDP for the third quarter of 2017, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +2.98% annual rate, down -0.08% from the prior quarter.

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The changes from the prior quarter reflect a general weakening of consumer and commercial spending growth, nearly offset by increased inventories and reduced imports. The contribution from consumer spending on goods dropped -0.24%, while the contribution from spending on services dropped -0.38% (a combined -0.62%). The inventory contribution became significant, at +0.73%, roughly a quarter of the entire growth. The contribution from fixed commercial investment was halved to +0.25% (from +0.53%). Governmental spending remained in a very minor contraction (-0.02%). The contribution from exports dropped -0.14% to +0.28%, while the contribution from imports turned positive, at +0.12%.

The BEA’s “bottom line” (their “Real Final Sales of Domestic Product“, which excludes inventories) decreased to +2.25%, down -0.69% from the prior quarter.

Real annualized household disposable income dropped -$19 to $39,280 (in 2009 dollars). The household savings rate also dropped -0.4% to 3.4%, the lowest level since the fourth quarter of 2007.

For this revision the BEA assumed an effective annualized deflator of 2.16%. During the same quarter (July 2017 through September 2017) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was 4.31%. Underestimating 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 materially lower at an +0.89% annualized growth rate.

Among the notable items in the report :

• The headline contribution from consumer expenditures for goods was reported to be +0.92% (down -0.24% from the prior quarter).
• The contribution to the headline from consumer spending on services weakened to +0.70% (down -0.38% from the prior quarter). The combined consumer contribution to the headline number was +1.62%, down -0.62% from 2Q-2017.
• The headline contribution from commercial private fixed investments decreased to +0.25%, down more than half (-0.28%) from the prior quarter. That continued to reflect a contraction in residential construction.
• Inventory growth provided a material boost to the headline number (+0.73%). This was a +0.61% improvement 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 price or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.
• Governmental spending was reported to be contracting very slightly, at a -0.02% rate. This was a +0.01% improvement from the prior quarter.
• Exports contributed +0.28% to the headline number, down -0.14% from the prior quarter.
• Imports added +0.12% to the headline, which was up +0.34% from the prior quarter. In aggregate, foreign trade added +0.42% to the headline number.
• The “real final sales of domestic product” grew at an annualized 2.25%, down -0.69% 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 annual disposable income reportedly dropped -$19 per annum. At the same time the household savings rate was reported to have dropped to 3.4% (down -0.4% from the prior quarter). It is important to keep this line item in perspective: real per-capita annual disposable income is up only +7.10% in aggregate since the second quarter of 2008 — a meager annualized +0.74% growth rate over the past 37 quarters.

The Numbers

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 minimal change in the quarter-to-quarter headline growth rate masks a material weakening of consumer and commercial spending growth. The notable takeaways from this report are :

• Consumer spending provided only 1.62% of the headline number, dropping -0.62% from the prior quarter.
• Commercial fixed investment softened, dropping more than half of its 2Q-2017 growth.
• Inventory growth is again distorting the headline.
• Household disposable income took another hit. Less money was available, and less money was saved — so that a significant portion of the already softening consumer spending came from savings, not pay checks.

A headline number sustained by bloating inventories and diminished savings is simply not quite as healthy as it might seem at first blush.