Surprise: Sharp Revision Down
by Rick Davis, Consumer Metrics Institute
May 29, 2014 – BEA Revises 1st Quarter 2014 GDP Sharply Downward to Outright Contraction at Nearly a 1% Annual Rate:
In their second estimate of the US GDP for the first quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was contracting at a -0.99% annualized rate. When compared to prior quarters, the new measurement is down over 3.6% from the 2.64% growth rate reported for the 4th quarter of 2013, and it is now more than 5% lower than the 4.19% reported for the 3rd quarter of 2013.
The largest revisions to the headline number were from inventories (revised downward by -1.05%) and imports (down -0.36%), and although exports improved somewhat from the prior report, they still subtracted -0.83% from the headline. Fixed investments in both equipment and residential construction continued to contract. The contraction rate for government spending also deepened slightly, with the downward revisions primarily in state and local governmental infrastructure investment.
Consumer spending was not revised significantly in this report, although the reported household savings rates dropped once again.
The previously reported quarterly growth in real annualized per-capita disposable income was revised downward to $95 (and that disposable income figure is now $227 per year lower than it was during the fourth quarter of 2012), while the household savings rate shrank again to 4.0% (down -0.9% from the 4.9% in the prior quarter and down -2.6% from the fourth quarter of 2012).
And lastly, for this report the BEA assumed annualized net aggregate inflation of 1.28%. During the first quarter (i.e., from January through March) the growth rate of the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was over a half percent higher at a 1.80% (annualized) rate, and the price index reported by the Billion Prices Project (BPP – which arguably reflected the real experiences of American households while recording sharply increasing consumer prices during the first quarter) was over two and a half percent higher at 3.91%. Under reported inflation will result in overly optimistic growth data, and if the BEA’s numbers were corrected for inflation using the BLS CPI-U the economy would be reported to be contracting at a -1.52% annualized rate. If we were to use the BPP data to adjust for inflation, the first quarter’s contraction rate would have been a staggering -3.64%.
Among the notable items in the report:
- The contribution of consumer expenditures for goods to the headline number actually increased to 0.16% (still down a substantial -0.50% from the 0.66% contribution in the prior quarter).
- The contribution made by consumer services spending remained essentially the same at 1.93% (up 0.36% from the 1.57% in the prior quarter). As mentioned last month, the increased spending was primarily for non-discretionary healthcare, housing, utilities and financial services – i.e., increased expenses that stress households without providing any perceived improvement to their quality of life.
- Commercial private fixed investments contracted, reducing the headline number by -0.36% (after adding 0.43% during the prior quarter). The contraction was led by reduced outlays for IT equipment, transportation equipment and residential construction.
- Inventories are now reported to be contracting substantially more sharply – subtracting -1.62% from the headline growth rate (down -1.60% from the prior quarter).
- Reduced governmental spending removed an aggregate -0.15% from the headline number. The Federal government “shutdown” is now in the prior reporting quarter (i.e., 4Q-2013), and a modest bounce-back in Federal non-defense spending added 0.2% to headline number that was more than offset by contracting defense spending and shrinking state and local infrastructure investments.
- Exports subtracted -0.83% from the headline number (a change of -2.06% from the fourth quarter). Export growth had been one of the bright spots of 2013 – even as the economies of many of our trading partners softened. That source of growth has ended.
- Imports subtracted -0.12% from the headline number (after adding 0.24% in the prior estimate).
- The annualized growth rate for the “real final sales of domestic product” dropped slightly to 0.63% (still down over 2% from the 2.66% in the prior quarter). This is the BEA’s “bottom line” measurement of the economy – and it remains substantially stronger than the headline number because of the sharp contraction in inventories.
- And as mentioned above, real per-capita annual disposable income grew by $95 during the quarter (a 1.03% annualized rate). But that number is down a material -$227 per year from the fourth quarter of 2012 (before the FICA rates normalized) and it is up only about 1% in total ($359 per year) since the second quarter of 2008 – some 23 quarters ago.
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 is a bad report, and the numbers speak for themselves. And looking at the trend lines, things are unlikely to get better anytime soon.
But we also feel compelled to digress from the bad news itself. While other people may be utterly shocked to find that the economy is in contraction, we are much more inclined outrage at the possibility that the BEA published clearly fictitious numbers last month in an effort to “ease” the readings towards the bad news that they knew (or should have known) would follow shortly:
- If they (the BEA) did not realize last month that the US economy was in contraction during the first quarter of 2014, they are sufficiently incompetent (in practice and procedure) to merit a complete overhaul and/or gutting of the agency.
- That said, gross incompetence is probably the lesser evil – simply because if they knew full well last month how bad the news really had become, they simply descended into a Goebbelesque world of publishing what they wanted the world to think.
- We wonder who the BEA is supposed to serve? The history texts tell us that the BEA’s genesis was in the second Roosevelt administration’s frustration at the poor performance of “live” economic data during the Great Depression. Maybe we need someone of FDR’s ilk to get really pissed at the quality of the “live” data currently emanating from the BEA. For example, recall how the BEA reported the first quarter of 2008 over time:
- The BEA is not serving anyone particularly well (except perhaps their political masters) with a track record like the above. In “real-time” they overstated the 1Q-2008 growth rate (during an election year) by a staggering +3.3% (and note that in the run-up to the election they initially revised that overstatement even further up). We are hard pressed to find another developed country (except China) reporting economic data on a less timely, accurate or transparent basis.
- And, is it remotely possible that the pace of economic growth has changed so dramatically in just two quarters – contracting by over 5% since the 3rd quarter of 2013? Has anyone sensed so catastrophic a change? Or for that matter, did anyone actually sense 4% economic growth in 3Q-2013? We suspect that we will find out (some time from now) that the third and fourth quarters of 2013 were nowhere near as wonderful as they were originally cast.
When reflecting on the BEA we have certainly offered a hard choice: incompetence or Goebbelesque. Sadly, we may be seeing a fair share of both.