by Rick Davis, Consumer Metrics Institute
In their third estimate of the US GDP for the third quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was growing at an astounding +4.96% annualized rate, up an additional +1.07% from their prior estimate for the 3rd quarter and now up +0.37% from the already very healthy 4.59% annualized growth rate registered during the second quarter.
This revision contained improved numbers for nearly every segment of the economy. The largest gains from the previous report were recorded in consumer expenditures for services (+0.61%, mostly in healthcare) and corporate non-residential investment (+0.24%, primarily in structures and intellectual property). Consumer expenditures for goods and inventories each added another +0.09% to the headline number, while governmental spending and imports added +0.04% each. Only exports weakened, softening their contribution to the headline number by -0.04% (offsetting the positive contribution from imports).
Despite the increased consumer spending, households actually lost disposable income in this revision — losing yet another $29 in real annualized per capita disposable income (now reported to be $37,496 per annum). This is now down a full $373 per year from the 4th quarter of 2012. The healthcare spending growth reported above came exclusively from reduced household savings, which dropped yet another -0.3% percent in this report.
As mentioned last month, softening energy prices play a major role in this report, since during the 3rd quarter dollar-based energy prices were plunging (and have even accelerated their dive since). US “at the pump” gasoline prices fell 9.8% quarter-to-quarter (a -33.8% annualized rate) — pushing most consumer oriented inflation indexes into negative territory. During the third quarter (i.e., from July through September) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was actually mildly dis-inflationary at a -0.10% (annualized) rate, and the price index reported by the Billion Prices Project (BPP — which arguably reflected the real experiences of American households) was slightly more dis-inflationary at -0.18% (annualized).
Yet for this report the BEA still assumed an effective positive annualized quarterly inflation of 1.39%. Over reported inflation will result in a more pessimistic growth data, and if the BEA’s numbers were corrected for inflation using the appropriate BLS CPI-U and PPI indexes the economy would be reported to be growing at an astronomical 6.52% annualized rate. If we were to use just the BPP data to adjust for inflation, the quarter’s growth rate would have been growing even faster, at a 6.60% annualized rate.
Among the notable items in the report :
- The headline contribution from consumer expenditures for goods was +1.06% (up +0.09% from the previous estimate, but down -0.27% from the prior quarter).
- The contribution made by consumer services spending to the headline surged to +1.15% (up +0.61% from the previous report and +0.73% from the 0.42% reported last quarter). The combined consumer contribution to the headline number by consumers was 2.21%, up +0.46% from the prior quarter.
- Commercial private fixed investments provided +1.21% of the headline number (down -0.24% from the 1.45% in the 2nd quarter), and this continued positive growth is nearly all non-residential. The increases shown in this report came almost equally from spending on structures and the recently added intellectual property category.
- Inventories subtracted only -0.03% from the headline number (and down a full -1.45% from the prior quarter).
- Governmental spending added +0.80% to the headline. The growth in Federal spending was probably spending pulled forward from the 4th quarter as a result of fiscal year-end budgetary maneuvers — and is therefore also likely to reverse in 4Q-2014.
- Exports are now reported to be adding 0.61% to the headline growth rate (down -0.04% from the previous estimate and -0.82% from the second quarter).
- Imports added +0.16% to the headline number (up +0.04% from the previous estimate, and up +1.93% from the prior quarter).
- The annualized growth rate for the “real final sales of domestic product” is now reported to be 4.99% (up +0.98% from the previous report). This is the BEA’s “bottom line” measurement of the economy, and it is slightly higher than the headline number because of the mildly shrinking inventories.
- And as mentioned above, real per-capita annual disposable income was revised downward by $29 per year. The new number represents an annualized growth rate of 1.25%. Real disposable income is still down a material -$373 per year from the fourth quarter of 2012 (before the FICA rates normalized) and it is up only 2.23% in total since the second quarter of 2008 — a miserable 0.35% annualized growth rate over the past 6 and a quarter years.
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 :
GDP Components Table
Total GDP = C + I + G + (X-M)
|Annual $ (trillions)||$17.6||=||$12.0||+||$2.9||+||$3.2||+||$-0.5|
|% of GDP||100.0%||=||68.2%||+||16.5%||+||18.2%||+||-2.9%|
|Contribution to GDP Growth %||4.96%||=||2.21%||+||1.18%||+||0.80%||+||0.77%|
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 :
Quarterly Changes in % Contributions to GDP
|Total GDP Growth||4.96%||4.59%||-2.11%||3.50%||4.51%||1.77%||2.75%||0.06%||2.48%||1.62%||2.25%||4.59%||0.84%||2.94%||-1.53%|
|Real Final Sales||4.99%||3.17%||-0.95%||3.84%||3.02%||1.47%||2.05%||1.86%||2.67%||1.35%||2.45%||1.79%||2.94%||1.90%||-0.57%|
Summary and Commentary
The puzzle in these numbers lies in the huge discrepancy between the reported face value of the economy’s growth (nearly 5% per annum, sustained for at least two quarters) and the continued public proclamations from the central bankers that the economy requires further (effectively indefinite) stimulus in the form of extraordinarily low interest rates.
There are several points to ponder:
- What does the Federal Reserve know that is either missed by (or not yet captured in) these numbers?
- Is increased consumer spending on non-discretionary healthcare (at the cost of raiding household savings) really good for the overall economy? And if real household disposable income continues to shrink, who exactly is benefiting from the reported growth?
- Since no other major developed country has credible growth data anywhere near the 5% ball park, how can US economic growth remain a statistical outlier over an extended period of time?
- There are at lease a few obvious and plausible answers to the above questions:
- The Fed knows that these numbers misrepresent the true health of the economy — either now or in the near future.
- US households (especially at the median) are not participating meaningfully in the reported growth — which is probably happening almost exclusively on the far side of the “wealth divide.”
- The US is benefiting globally (in an almost predatory fashion) from having the strongest of currencies and the safest of investment havens.
Unfortunately, the latter two answers carry with them destabilizing social consequences that are far worse (internally and externally) than the mere possibility of yet another economic slowdown — currently utterly unforeseen by the BEA.
From our perspective we actually hope that the Fed knows far more than is evident in this latest happy BEA report.