Revised GDP is Above Zero, Barely

February 28, 2013 – BEA Revises 4th Quarter 2012 GDP Upward to a 0.14% Annual Growth Rate

by Rick Davis, Consumer Metrics Institute

In their second estimate of the US GDP for the fourth quarter of 2012 the Bureau of Economic Analysis (BEA) reported that the economy was growing at a minuscule 0.14% annualized rate, roughly 3% worse than the 3.09% growth rate that they recorded for the prior quarter. The new number is 0.28% higher than the previously published estimate for the fourth quarter, but as such it merely represents an improved understanding of historic 4th quarter 2012 economic data and not improved month-to-month economic activity.

Neither this 0.14% positive growth rate nor the previously published -0.14% contraction rate show an economy that is statistically in anything other than a dead stall. The positive revisions came from fixed investments and trade (both increased exports and reduced imports). Consumer activities were marginally weaker than previously reported, and inventories continued to shrink.

For this set of revisions the BEA assumed annualized net aggregate inflation of 0.88%. In contrast, during the third quarter the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) recorded a dis-inflationary -0.75% annualized “inflation” rate. As a reminder: an overstatement of assumed inflation decreases the reported headline number — and in this case the BEA’s relatively high “deflater” (more than 1% above the CPI-U) hurt the published headline rate. If the CPI-U had been used to convert the “nominal” GDP numbers into “real” numbers, the reported headline growth rate would have been a 1.77% growth rate. If data for online prices from the Billion Prices Project had been used to deflate the BEA’s nominal data, the growth rate would have been 1.02% annualized.

And the previously reported improvements in real per capita disposable income were essentially sustained, with the annualized growth rate for per capita disposable income now reported to be a still healthy +5.65%. It should be noted that more than half of this increase in disposable income was offset by increased personal savings (up about $132 billion per year, or roughly 1% of GDP) as households remained cautious in their spending habits in anticipation of the fully restored FICA deductions that will take back most of the fourth quarter’s net disposable household cash gain during 1Q-2013.

Among the notable items in the report:

  • The contribution of consumer expenditures for goods to the headline number was revised downward to 1.03% (from 1.08% in the previous estimate).
  • The contribution made by consumer services remained flat at 0.44%.
  • The growth rate contribution from private fixed investments was up to 1.36% (from 1.19% in the previous report).
  • Inventory draw-downs accelerated, removing -1.55% from the headline number. Since the inventory data in the BEA’s reports are often impacted significantly by not-fully-compensated commodity price changes, it is difficult to tease out of these numbers the true source of any changes (e.g., uncorrected oil pricing anomalies or genuine changes to supply chain stocks and/or manufacturing schedules).
  • The previously reported sharp decrease in government spending became slightly more negative, removing -1.38% from the headline number.
  • Declining exports removed -0.55% from the headline number (an improvement, however, of +0.26% from the -0.81% negative contribution previously reported). The net drag from exports is consistent with a generally weakening global economy.
  • And reduced imports actually added +0.79% to the headline growth rate (up from the 0.56% in the previous report). Again, this shows as a positive component in the GDP equation even though weakening demand for imports is often actually a sign of a slowing economy.
  • The annualized growth rate of “real final sales of domestic product” was revised upward to 1.69%, still some -0.67% below the prior quarter. This is the BEA’s “bottom line” measurement of the economy.
  • And real per-capita disposable income was revised downward slightly to $33,143 per year, although that revised number is still about $450 per year above the numbers published for 3Q-2012. From an economic standpoint however, a significant share of that was absorbed when the personal savings rate soared from 3.6% to 4.7%, pulling $365 of that annual improvement into savings or deleveraging activities instead of consumptive spending.

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:

Click to enlarge

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 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 Finals Sales of Domestic Product” and listed the quarters in columns with the most current to the left:

Click to enlarge


Despite the new-found minuscule “growth” reported in this release, there are ample reasons to remain cautious about the economy:

  • Even as revised this data represents an economy that is statistically in a dead stall, “growing” at a rate some 3% less than during the prior quarter (the greatest downward quarter-to-quarter change since the fourth quarter of 2008).
  • This data is still reporting 4Q-2012, a quarter that in retrospect may be viewed as the last gasp of the “Great Recovery” – before there were significant economic headwinds created by reductions in consumer take-home pay, rising gas prices, sequestered federal spending and accelerating contractions in global trade. If all other components of the economy stay the same, those factors alone could remove something like 3% from real-time economic “growth” by the end of the first quarter of 2013: the normalization of FICA deductions alone could reduce consumer spending enough to pull the headline number down by 1%, the $.50 per gallon increase in gas prices could similarly remove another 0.5% from the headline number, weakening exports could easily reduce the headline number by another 1% and the federal budget sequestrations – if fully implemented and sustained — should eventually pull (at maximum, despite doomsday rhetoric) an additional 0.5% from the headline number.
  • However, with respect to the “sequestrations”: political will and doomsday rhetoric notwithstanding, even if they are implemented by Congressional mandate (or inaction) there may be no reason to expect actual short term government spending to change. The budgetary shenanigans during the third quarter of 2012 (when a defense spending spree created a phantom boost to pre-election economic data by bringing some spending forward by a quarter — and incidentally across a fiscal year boundary) probably taught the US Federal bureaucracy that as a practical matter they can spend at will and with utter impunity from the budgetary intentions of the fiscally conservative majority in the US House of Representatives.

In the day-to-day reality of this Administration there simply may be no legal or political consequences to overspending Congressionally approved budgets in pursuit of the perceived greater good.
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