by Rick Davis, Consumer Metrics Institute
In their first estimate of the US GDP for the fourth quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a +2.64% annualized rate, down -2.32% from the much celebrated +4.96% growth rate reported for the prior quarter.
The growth was nearly halved by substantial changes in a number of its components: imports took -1.55% from the quarter’s growth rate, exports pulled another -0.24% from the number, contracting governmental spending took another -1.20% off the top, and plunging fixed investment removed yet another -0.84% from the headline.
Inventories and consumer spending were the only bright spots. Inventory growth added +0.85% to the headline. Increased spending on goods added +0.14% to the headline number, while spending on household services added 0.52% to the headline.
The increased consumer spending came from both improved disposable income and reduced savings. Households had an additional $279 in real annualized per capita disposable income (now reported to be $37,775 per annum). This is still down $94 per year from the 4th quarter of 2012. The household savings rate dropped another -0.1% for the quarter to 4.6%.
As mentioned last quarter, plunging energy prices are likely playing havoc with many of the numbers in this report. US “at the pump” gasoline prices fell 33% quarter-to-quarter — pushing all consumer oriented inflation indexes firmly into negative territory. During the fourth quarter (i.e., from October through December) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was solidly dis-inflationary at a -2.47% (annualized) rate, and the price index reported by the Billion Prices Project (BPP — which arguably more fully reflected the “at the pump” impact on American households) was significantly more dis-inflationary, dropping a full -2.14% quarter-to-quarter (an astounding -8.30% annualized rate during the quarter).
Yet for this report the BEA still assumed a very mildly dis-inflationary annualized deflator of only -0.09%. The disparity between the BEA’s and the BLS’s “deflators” raises some serious consistency issues. Over reported inflation (or under reported dis-inflation) will result in a more pessimistic growth data, and if the BEA’s “nominal” numbers were corrected for inflation using the line-item appropriate BLS CPI-U and PPI indexes, the economy would be reported to be growing at an implausibly high 7.17% annualized rate. Clearly the BEA’s deflator is troubling, but using the more reasonable deflators from the BLS generates nonsensical growth rates when applied to the BEA’s nominal data — suggesting that the BEA’s initial nominal data may be more overstated (or guesstimated) than reasonable deflators can handle.
Among the notable items in the report :
- The headline contribution from consumer expenditures for goods was +1.20% (up +0.14% from the prior quarter).
- The contribution made by consumer services spending to the headline surged to +1.67% (up +0.52% from the last quarter). Housing, utilities and spending on recreational services provided the boost, while a drop in non-profit spending provided a partial offset. The combined consumer contribution to the headline number by consumers was 2.87%, up +0.66% from the prior quarter.
- Commercial private fixed investments provided only +0.37% of the headline number (down -0.84% from the 1.21% in the 3rd quarter), and this drop was nearly all in heavy equipment (industrial and transportation). The reported growth came almost entirely from IT spending.
- Inventories contributed +0.82% to the headline number (up a full +0.85% from the prior quarter). This line item is roughly zero-sum over longer time spans, and this gain can be expected to reverse over the coming quarters.
- As we expected, governmental spending removed -0.40% from the headline (down -1.20% from the 3rd quarter). The prior quarter’s growth in Federal spending was in fact entirely spurious: spending pulled forward from the 4th quarter as a result of fiscal year-end budgetary maneuvers. For all of the BEA’s other highly opaque “seasonal adjustments,” they seem to completely fail to correct for seasonal anomalies caused by Federal fiscal year-end budgetary shenanigans (although cynics might point out that the failure to seasonally adjust for those shenanigans consistently provides spurious growth just prior to November elections that isn’t reversed out until after the subsequent “State of the Union” address).
- Exports are now reported to be contributing +0.37% to the headline growth rate (down -0.24% from the third quarter).
- Imports subtracted -1.39% from the headline number (down -1.55% from the prior quarter). The prior quarter’s imports numbers are among those that would be most susceptible to price related distortions.
- The annualized growth rate for the “real final sales of domestic product” is now reported to be only +1.82% (down -3.17% from the prior quarter). This is the BEA’s “bottom line” measurement of the economy, and that “bottom line” rate lost nearly two-thirds of its prior quarter’s value.
- And as mentioned above, real per-capita annual disposable income was reported to have grown by $279 per year. The new number represents an annualized growth rate of 3.01%. Real disposable income is still down -$94 per year from the fourth quarter of 2012 (before the FICA rates normalized) and it is up only 2.99% in total since the second quarter of 2008 — a pathetic 0.45% annualized growth rate over the past 6 and a half years.
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)||$17.7||=||$12.1||+||$3.0||+||$3.2||+||$-0.5|
|% of GDP||100.0%||=||68.4%||+||16.7%||+||18.0%||+||-3.1%|
|Contribution to GDP Growth %||2.64%||=||2.87%||+||1.19%||+||-0.40%||+||-1.02%|
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||2.64%||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||1.82%||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
Well, the 5% growth was nice while it lasted. And now we know why the Fed is disinclined to remove stimulus by “normalizing” interest rates.
Among our take-aways from this report are:
- For once, and at face value, the +1.82% “bottom line” Real Final Sales growth rate (corrected for inventory changes) seems both plausible and feels about right for this economy.
- Looking back, this reports tells us that the 5% growth in the third quarter probably had more than its share of smoke and mirrors — including the gratuitous Federal fiscal year end shenanigans, the political gift that keeps on giving.
- And we hate to get technical, but we are truly troubled by consistency and transparency issues raised by this report. We have been critical of the BEA’s deflators many times before, suspecting that under reported inflation was artificially boosting the headline numbers. Now that the situation has completely reversed (with the BEA under reporting price DIS-inflation), we are even more troubled by an inability to derive meaningful or plausible alternate growth rates via BLS provided deflators. We understand that the BEA and BLS price tracking methodologies are vastly different, and comparing their deflators has serious “apples and oranges” issues. Nevertheless, however correct and consistent the BEA’s -0.09% quarterly deflator is from their methodology standpoint, it is patently absurd from a real-world perspective. Unfortunately, that absurd deflator generates a reasonable growth number when applied against the BEA’s nominal data. The mathematical implication is that the nominal data is just as absurd as the -0.09% deflator.
Clearly something has been pulled out of a hat. We just can’t tell what.