Consumers Overcome Contracting Investment and Inventory for 1.2% GDP Growth in Q2 2016

by Rick Davis, Consumer Metrics Institute

July 29, 2016 – BEA Estimates 2nd Quarter 2016 GDP Growth At 1.21%: 

In their first preliminary estimate of the US GDP for the second quarter of 2016, the Bureau of Economic Analysis (BEA) reported that the growth rate was +1.21%, up 0.38% from a downwardly revised prior quarter. 

The most notable item in the report was the continued contraction of US commercial fixed investments, which subtracted -0.52% from the quarter’s headline growth rate (down -0.37% from a downwardly revised first quarter). This was the third consecutive quarterly decline for fixed investments. Inventories also contracted (subtracting -1.16% from the headline), in this case for the fifth consecutive quarter. 

The positives from the report were almost entirely consumer spending. Consumer spending on goods rebounded nicely from a couple of soft quarters to provide a decent 1.45% of the headline (up 1.20% from an upwardly revised first quarter), while spending on services also strengthened to a healthy 1.38% contribution (up 0.52% from a downwardly revised first quarter). Combined spending on goods and services provided a reported 2.83% of the headline annualized growth rate. 

The BEA’s treatment of inventories can introduce noise and seriously distort the headline number over short terms — which the BEA admits by also publishing a secondary headline that excludes the impact of inventories. The BEA’s “bottom line” (their “Real Final Sales of Domestic Product”) was a +2.37% growth rate, up 1.13% from 1Q-2016. 

Real annualized household disposable income was reported to have grown by $181 during the quarter, to an annualized $38,894 (in 2009 dollars). The household savings rate dropped to 5.5% (from a revised 6.1% in the prior quarter). 

For this revision the BEA assumed an effective annualized deflator of 2.22%. During the same quarter (April 2016 through June 2016) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was 3.42%. Under estimating inflation results in correspondingly optimistic growth rates, and if the BEA’s “nominal” data was deflated using CPI-U inflation information the headline growth number would have been significantly lower, at an essentially flat +0.03%. 

Separately the BEA revised all of their historic data for 2013 to date. Each of the preceding 4 quarters was revised downward in total, with the negative changes ranging from a material -1.30% (2Q-2015) to an insignificant -0.01% (3Q-2015). The average revision over the entire 13 quarter span was 0.0215%, indicating that the revisions were mostly the zero-sum moving of reported economic activity from one quarter to another. 

Among the notable items in the report :

• The headline contribution from consumer expenditures for goods improved significantly to a +1.45% growth (representing a 1.20% improvement from the prior quarter). 

• The contribution to the headline from consumer services also improved to +1.38% (up +0.52% from the prior quarter). The combined consumer contribution to the headline number was +2.83%, up +1.72% from 1Q-2016 — breaking a prior three quarter trend of materially weaker growth in consumer spending. 

• The headline contribution from commercial private fixed investments remained negative at -0.52%, down -0.37% from a downward revised prior quarter. 

• The contribution from inventories remained negative, subtracting -1.16% from the headline number and down -0.75 from 1Q-2016. It bears repeating that the BEA’s inventory numbers are exceptionally noisy, subject to significant distortions/anomalies caused by commodity price swings while representing a zero reverting (and long term zero sum) series. 

• Governmental spending softened, subtracting -0.16% from the headline. This contraction was entirely due to decreased capital spending at state and local levels, with Federal spending essentially flat. 

• The contribution to the headline number from exports was positive at +0.16% (an improvement of +0.25% from a downward revision of the prior quarter). 

• Imports added +0.06% to the headline number, down -0.03% from the prior quarter. 

• The “real final sales of domestic product” improved to +2.37%, up +1.13% from a downwardly revised prior quarter. This is the BEA’s “bottom line” measurement of the economy and it excludes the reported inventory contraction. 

• As mentioned above, real per-capita annual disposable income improved by $181 during the quarter, and household savings rates declined — which largely accounts for the improved consumer spending. It is important to keep this line item in perspective. Real per-capita annual disposable income is up only +6.04% in aggregate since the second quarter of 2008 — a meager annualized +0.74% growth rate over the past 32 quarters. 

The Numbers, with Prior Quarters Revised 

As a quick reminder, the classic definition of the GDP can be summarized with the following equation : 

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 report shows a US economy moving forward with a lack-luster 1.21% growth rate. It also contained downward revisions to the prior 4 quarters. 

Recapping the key items in this report:

• Private commercial investment contracted for the third consecutive quarter. 

• Improved consumer spending growth was the only redeeming part of the report. 

• Most of the increased consumer spending came from decreased household savings. 

Although this report is net (and mildly) positive, the increased consumer spending masked considerable commercial weakness.