Strong GDP Numbers Not Reaching Main Street

BEA Estimates 4th Quarter 2013 GDP Growth at 3.22% Annual Rate, Down Modestly from 3rd Quarter

by Rick Davis, Consumer Metrics Institute

In their first estimate of the US GDP for the fourth quarter of 2013, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a 3.22% annualized rate, down .9% from the 4.12% growth rate during the third quarter. The weakening in the headline growth number came principally from commercial fixed investments (which pulled the headline down by -0.75%), slowing inventory growth (removing another -1.25%) and government spending (with the “shutdown” slicing an additional -1.01% from the headline). Positive contributions came from consumer services (adding 0.82% to the headline) and foreign trade (boosting it another 1.20%). The BEA’s own “bottom line” growth rate for the economy (the “real final sales of domestic product”) strengthened to a 2.80% annualized growth rate, principally as a result of the slowing expansion in inventories.

Real annualized per capita disposable income was reported to have been flat during the fourth quarter, and households had to reduce their personal savings rate to 4.3% (from 4.9% in the prior quarter). That savings rate had previously been recovering from a 2.5% hit during the first quarter as households struggled to absorb the 2% increase in FICA tax rates – but most of that recovery in savings rates has now been given back as households continue to deal with stagnating incomes.

Finally, for this report the BEA assumed annualized net aggregate inflation of 1.30%. 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 lower at 1.09% (annualized), while in contrast the price index reported by the Billion Prices Project (BPP) was higher at an annualized rate of about 1.6%. 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 somewhat higher 3.47%, but using the BPP index (which arguably best reflects the experiences of the American consumer) would have generated a lower 2.96% annualized growth rate.

Among the notable items in the report:

  1. The contribution of consumer expenditures for goods to the headline number increased to 1.12% (up slightly from 1.03% in the prior quarter).
  2. The contribution made by consumer services improved to 1.14% (up significantly from the 0.32% contribution in the prior quarter).
  3. The growth rate contribution from private fixed investments dropped to 0.14% (down substantially from the 0.89% in the prior quarter).
  4. Inventories continued to grow, but at a much slower pace – contributing only 0.42% to the headline growth rate (down -1.25% from the prior quarter).
  5. The “shutdown” caused a net contraction in governmental expenditures, subtracting -0.93% from the headline number. Although all of the contraction occurred at the Federal level, state and local spending was essentially flat.
  6. Exports contributed 1.48% to the overall growth rate, up nearly a full percent from the 0.52% in the prior quarter.
  7. And imports now subtracted a mere -0.15% from the headline number (compared to -0.39% during the prior quarter).
  8. The annualized growth rate for the “real final sales of domestic product” increased to 2.80% (up from the 2.45% in the previous quarter). This is the BEA’s “bottom line” measurement of the economy – which remains somewhat weaker than the headline number because of the ongoing (but slower) buildup of inventories.
  9. And as mentioned above, real per-capita disposable income was utterly flat from quarter to quarter. And that number is still down $317 per year relative to the fourth quarter of 2012 (before the FICA rates normalized).

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 TableClick 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 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 GDPClick to enlarge

Summary and Commentary

For the past quarter we have been examining how the surprisingly robust BEA growth estimates have been impacting the size and duration of the Federal Reserve’s QE program. Yesterday’s Fed news had already told us what to expect from this announcement. At face value a new headline growth rate above 3% (and a prior quarter number north of 4%) qualifies as “healthy economic growth,” and continues to place the US among the fastest growing developed countries. And absent the “shutdown” we could have had a second consecutive quarter above 4%. The growth rates certainly provide cover for continued tapering. And in fact these kinds of growth rates might argue for a return to more historically normal interest rates.

Given this healthy economic growth, the US electorate should be thrilled – happy to be part of one of the fastest growing developed economies.

Yet they are clearly less than thrilled with the economy, let alone the administration or their representatives in Congress. Why? With real household income stagnant and still below where it was in 2012, the electorate’s view of the economy differs substantially from these numbers.

Unlike their elected representatives, they have to deal with the “real world” problems of making ends meet while juggling debt loads at credit card rates. It is likely that they have a deep and abiding sense that either these numbers are a bureaucratic fiction, or (more troubling) they are benefiting someone else:

  1. The headline unemployment numbers mask a major deformation of the work force – with fewer people choosing to look for work and more being forced to accept multiple part time jobs. People on the street understand the difference between an increasing quantity of part-time work and the quality of full-time jobs.
  2. Real per capita disposable income was down -0.85% during 2013. And to maintain the prior year’s standard of living, the household savings rate plunged 2.3%.
  3. For many households (and especially the 18-35 demographic) the Affordable Care Act (aka “ObamaCare”) will result in increased net monthly outlays for health insurance.
  4. The per capita numbers continue to mask an ongoing shift in income distribution: although the average per capita income data has grown some 3.3% since October 2008 (per the BEA), the median household income has shrunk some 7% over that same time span (per Sentier Research). The typical member of the electorate lives at the median, and they are not sharing the growth reported by the BEA.

On the surface these were nice numbers, enough to satisfy the Federal Reserve that more of the same lies ahead. Unfortunately, most households would probably prefer something far better than an extension of that “same.”

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