The American Consumer is Doing Less to Support GDP Growth

by Rick Davis, Consumer Metrics Institute

April 28, 2016 – BEA Estimates 1st Quarter 2016 GDP Growth At +0.54%:

In their first “preliminary” estimate of the US GDP for the first quarter of 2016, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a +0.54% annualized rate, down -0.84% (well more than half) from the +1.38% rate recorded for the fourth quarter of 2015.

The reasons for the -0.84% decline in the headline number were numerous, with much lower contributions from both consumer expenditures for goods (-0.33%) and commercial fixed investment (-0.33%) having the greatest impact. Imports (-0.13%), inventories (-0.11%), consumer services (-0.06%), and exports (-0.06%) continued the quarter-over-quarter declines in growth rates. Only governmental spending showed an improved contribution to the headline number improved relative to 4Q-2015 (+0.20%).

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 essentially cut in half relative to the prior quarter, dropping from +1.60% to +0.87%.

Annualized household disposable income improved in this report. Real annualized per capita disposable income was reported to be $38,511 per annum, up $208 per year from the prior quarter. The household savings rate also increased to 5.2%.

For this revision the BEA assumed an effective annualized deflator of 0.70%. During the same quarter (January 2016 through March 2016) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was mildly dis-inflationary at -0.20%. Slightly over estimating inflation results in slightly pessimistic growth rates, and if the BEA’s “nominal” data was deflated using CPI-U inflation information the headline growth number would be a significantly better +1.45%.

Among the notable items in the report :

• The headline contribution from consumer expenditures for goods was cut to an essentially flat +0.03% (down -0.33% from the prior quarter).
• The contribution to the headline from consumer services declined to +1.24% (down +0.06% from the fourth quarter). The combined consumer contribution to the headline number was +1.27%, down -0.39% (about one-fourth) from 4Q-2015 — which in turn was down one-fourth from 3Q-2015. This report represents the third consecutive quarter of materially weaker growth in consumer spending.
• The headline contribution from commercial private fixed investments turned negative at -0.27%, down -0.33% from the prior quarter. This is the first contraction in commercial fixed investment since the first quarter of 2011.
• The contribution from inventories remained negative, subtracting -0.33% from the headline number. This was a weakening of -0.11% from the -0.22% recorded in 4Q-2015. 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 added +0.20% to the headline. This was entirely due to increased capital spending at state and local levels, with Federal spending actually contracting -0.11%.
• The contribution to the headline number from exports remained in contraction at -0.31% (down -0.06% from the prior quarter).
• Imports deducted -0.02% from the headline number, down -0.13% from the mild arithmetic growth reported for the prior quarter.
• The “real final sales of domestic product” was down a significant -0.73% from the prior quarter, and down nearly 2% from 3Q-2015. 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 was reported to be up $208 in this report, while the household savings rate increased in concert with the strengthening incomes. However, it is important to keep this line item in perspective. Real per-capita annual disposable income is up only +5% in aggregate since the second quarter of 2008 — a meager annualized +0.63% growth rate over the past 31 quarters.

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 :

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

Although the headline remained positive, this is not a report that shows a robust economy. Among the troubling aspects of the report:

• The growth rate for consumer spending took another significant hit, dropping substantially for the third consecutive quarter. In fact, the growth rate for consumer spending on goods was barely positive, at a miserable +0.03%. And non-discretionary spending on health care and housing provided most of the remaining growth in consumer services spending.
• Private investment contracted for the first time since the first quarter of 2011.
• Exports went deeper into the red.

Looking at the past three quarters as a group, we can see a slow-motion slide into either stagnation or contraction. It is truly sad when stagnation looks to be the better alternative.