30 October 2014: BEA Report Higher then Expected, Buoyed by Government Spending
by Rick Davis, Consumer Metrics Institute
In their first estimate of the US GDP for the third quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a +3.54% annualized rate, down a little more than a percent from the second quarter.
“Improving” imports and government spending are the stars of this report. Imports swung into positive territory with a +0.29% contribution to the headline number, up +2.06% from the prior quarter. Similarly, governmental spending contributed +0.83% to the headline, up over a half percent from the 2nd quarter (with Federal defense “consumption expenditures” creating a +0.76% boost to the headline number all by itself even as growth in state and local spending softened).
Essentially all of the other line items were either flat or had a negative quarter-to-quarter impact on the headline. Inventories (as expected) reverted to mean and took -0.57% out of the headline. Commercial fixed investments grew at about half the rate reported during the prior quarter, the growth in exports lost about a third, the growth rate for consumer spending on goods was halved, and although consumer spending on services did increase, the increase was a relatively mild +0.10%.
Some good news: real annualized per-capita disposable income was reported to be $37,671 — up $177 per year from the prior quarter (although still down $198 from the 4th quarter of 2012). Again a significant portion of that increased disposable income went into savings, with the savings rate increasing to 5.5% — once more the highest savings level since 4Q-2012.
Inflation (or disinflation/deflation) plays a major part in this report, since during the quarter dollar-based energy prices were plunging. US “at the pump” gasoline prices fell from $3.68 per gallon to $3.32 during the quarter, a 9.8% quarter-to-quarter decline and 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 deflationary 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 deflationary at -0.18% (annualized).
Yet for this report the BEA effectively assumed a positive annualized quarterly inflation of 1.28%. Over reported inflation will result in a more pessimistic growth data, and if the BEA’s numbers were corrected for inflation using the BLS CPI-U the economy would be reported to be growing at a spectacular 4.97% annualized rate. If we were to use the BPP data to adjust for inflation, the quarter’s growth rate would have been an astounding 5.07% annualized rate.
Among the notable items in the report :
- The headline contribution of consumer expenditures for goods was 0.70% (down -0.63% from the prior quarter).
- The contribution made by consumer services spending increased to 0.52% (up +0.10% from the 0.42% reported last quarter). The combined contribution to the headline number by consumers was 1.22%, down -0.53% from the prior quarter.
- Commercial private fixed investments provided +0.74% of the headline number (down -0.71% from the 1.45% in the 2nd quarter), and this continued positive growth continues to be almost exclusively in non-residential construction.
- Inventories subtracted -0.57% from the headline number (down -1.99% from the +1.42% reported for the second quarter).
- Governmental spending was up +0.52%, now adding 0.83% to the headline. The improvement was all at a Federal level, in spending on “consumption expenditures”. The growth of state and local spending softened -0.23% relative to the 2nd quarter.
- Exports are now reported to be adding 1.03% to the headline growth rate (down -0.40% from the second quarter).
- Imports added +0.29 to the headline number (a +2.06% turnaround from the prior quarter). The combined impact of the foreign trade quarter-to-quarter on the headline number was a significant +1.66%.
- The annualized growth rate for the “real final sales of domestic product” is now reported to be 4.11% (up +0.94% from the earlier quarter). This is the BEA’s “bottom line” measurement of the economy, and it is now higher than the headline number because of the shrinking inventories.
- And as mentioned above, real per-capita annual disposable income was $177 per year higher than during the prior quarter. The new number represents an annualized growth rate of 1.90%. That said, the real disposable income is still down a material -$198 per year from the fourth quarter of 2012 (before the FICA rates normalized) and it is up only 2.71% in total since the second quarter of 2008
- A miserable 0.43% annualized growth rate over the past 6 and a quarter years.
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 :
GDP Components Table
|Annual $ (trillions)||$17.5||=||$12.0||+||$2.9||+||$3.2||+||$-0.5|
|% of GDP||100.0%||=||68.2%||+||16.3%||+||18.3%||+||-2.8%|
|Contribution to GDP Growth %||3.54%||=||1.22%||+||0.17%||+||0.83%||+||1.32%|
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||3.54%||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||4.11%||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
Frankly, this report once again sends mixed messages:
- On the surface it strengthened the Fed’s hand for completing the QE taper. An economy that is growing at 3.54% is presumably healthy enough to need very little additional help from central banking officials.
- That said, consumers are not spending as if the economy is healthy. Consumers generated only 1.22% of that headline growth, and they are still 68.2% of the economy. The growth in real per-capita disposable income is welcomed, but increased savings absorbed a significant portion of that growth. Apparently consumers remain wary.
- And the inventory worm has turned. It provided +1.42% of last quarter’s headline number, and promptly subtracted -0.57% from this quarter’s number. As we have mentioned many times, this is a line item that over the long haul has been essentially a zero sum series. If it continues to revert to a long term zero sum we could see at least another quarter of negative contribution.
- The growth in Federal “consumption expenditures” is an annual end-of-fiscal-year ritual. These are “expenditures” that are solely designed to expend any remaining budget allocations before they vanish at the end of September. In fact, the spending is only pulled forward from the fourth quarter — when Federal spending “growth” generally reverses. Those more cynical than us might point out that the annual specious Federal “growth” contribution is also conveniently reported just before election days.
- The wild card in all of this is reflected in the CPI and BPP numbers: the strengthening of the dollar has created an apparent disinflationary pricing environment for some goods that is likely playing havoc with the BEA’s computations for inventories, exports and imports. Imports are also certainly being impacted by the double whammy of increased domestic production and crashing oil prices. In any event, the impact of the strength of the dollar is likely masking to some extent what is happening in the underlying “real” economy.
In some regards this report contains far too much noise to be able to tease out any real signals regarding the economy. Unfortunately, that situation is unlikely to improve for some time.