Consumers Continue to Support Healthy GDP Growth

by Rick Davis, Consumer Metrics Institute

August 30, 2017 – BEA Revises 2nd Quarter 2017 GDP Growth Upward to 3.04%:

In their second estimate of the US GDP for the second quarter of 2017, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +3.04% annual rate, up +0.48% from their previous estimate and up +1.80% from the prior quarter.

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Consumer spending was revised upward to a +2.27% annualized growth rate (up +0.34% from the previous estimate and up +0.95% from the prior quarter). The inventory contribution continued to be essentially neutral (+0.02), while the previous growth in commercial fixed investment was revised upward (to +0.58%). Governmental spending was revised back into contraction (-0.05%), and the growth rates for both exports (+0.45%) and imports (-0.23%) moderated.

The BEA’s “bottom line” (their “Real Final Sales of Domestic Product”, which excludes inventories) was revised upward to +3.02%, up +0.32 from the prior quarter.

Real annualized household disposable income was revised upward $6 to $39,292 (in 2009 dollars). The household savings rate was again revised downward by -0.1% to 3.7% (down -0.2% from the prior quarter).

For this revision the BEA assumed an effective annualized deflator of 0.96%. During the same quarter (April 2017 through June 2017) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was a minuscule 0.06%. Over estimating inflation results in pessimistic growth rates, and if the BEA’s “nominal” data was deflated using CPI-U inflation information the headline growth number would have been materially higher at a very healthy +3.96% annualized growth rate.

Among the notable items in the report :

• The headline contribution from consumer expenditures for goods was reported to be +1.27% (up +1.12% from the prior quarter).
• The contribution to the headline from consumer spending on services also strengthened to +1.00% (although that remained down -0.17% from the prior quarter). The combined consumer contribution to the headline number was +2.27%, up +0.95% from 1Q-2017.
• The headline contribution from commercial private fixed investments was revised upward to +0.58%, although that was still down a material -0.69% from the prior quarter. That continued to reflect a reported contraction in residential construction.
• Inventory continued to be neutral (at +0.02%). This was a +1.48% 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 slightly, at a -0.05% rate. This was a +0.06% improvement from the prior quarter.
• Exports contributed +0.45% to the headline number, down -0.40% from the prior quarter.
• Imports deducted -0.23% from the headline, which was up +0.40% from the prior quarter. In aggregate, foreign trade added +0.22% to the headline number.
• The “real final sales of domestic product” grew at an annualized 3.02%, up +0.32% 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 was revised downward slightly (by $6 per annum). At the same time the household savings rate was reported to have dropped another -0.1% (now down -0.2% from the prior quarter). It is important to keep this line item in perspective: real per-capita annual disposable income is up only +7.13% in aggregate since the second quarter of 2008 — a meager annualized +0.77% growth rate over the past 36 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

At face value, this report records an economy in a state of healthy growth. The notable takeaways from this report are :

• Consumer spending provided 2.27% to the headline number, more than two thirds of the total growth.
• Commercial fixed investment was revised upward significantly to +0.58%, although there continued to be a contraction in residential construction.
• Inventories did not distort the headline.
• Exports and Imports continue to provide a net positive (+0.22%) contribution to the headline number.

Per this report, the US economy is in a very pleasant zone — slightly over the Goldilocks +3% number that is neither too cool nor too hot. Consumer spending has rebounded into normal ranges. It would appear that US consumers have shrugged off the unrelenting domestic political drama and moved on to more normal spending patterns — although they are dipping into savings to do so. In short, this report is certainly good enough to provide the Federal Reserve with the data needed to justify moving forward with their “normalization” campaign.