Downfall of GDP Growth

February 28, 2014 – BEA Revises 4th Quarter 2013 GDP Growth Down to 2.37% Annual Rate

by Rick Davis, Consumer Metrics Institute

In their second 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 2.37% annualized rate, down -.85% from the 3.22% growth rate previously reported and down sharply (-1.75%) from the 4.19% reported for the 3rd quarter. The weakening in the headline growth was broadly evident in the details, with consumer spending on goods contributing to nearly half of the decrease (-.40%), and lower growth rates seen in inventories (-.28%), consumer services (-.14%), governmental spending (-.12%), exports (-.26%) and imports (-.09%). The only major positive contribution came from fixed investment (which added an additional +.44% to the headline number). The BEA’s own “bottom line” growth rate for the economy (the “real final sales of domestic product”) weakened by over a half percent to a 2.23% annualized growth rate, principally as a result of a significant slowing in the expansion in inventories.

Real annualized per capita disposable income was now reported to be shrinking during the fourth quarter, and the household savings rate was adjusted upward slightly to 4.5% (although that is still down from 4.9% in the prior quarter). That savings rate has 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 contracting disposable incomes.

Finally, for this report the BEA assumed annualized net aggregate inflation of 1.62%. 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 the price index reported by the Billion Prices Project (BPP – which arguably best reflects the experiences of the American consumer) was essentially the same as that used in this report.

Among the notable items in the report:

  1. The contribution of consumer expenditures for goods to the headline number decreased materially to 0.72% (down -0.40%, and -0.31% lower than the 1.03% contribution in the prior quarter).
  2. The contribution made by consumer services weakened to 1.00% (down from the 1.14% previously reported).
  3. The growth rate contribution from private fixed investments increased sharply to 0.58% (but it is still down from the 0.89% in the prior quarter).
  4. Inventories continued to grow, but at a marginal pace – contributing only 0.14% to the headline growth rate (down -1.53% from the prior quarter).
  5. The “shutdown” caused a net contraction in governmental expenditures, subtracting -1.05% from the headline number. Although most of the contraction occurred at the Federal level, state and local infrastructure investment was now reported to be contracting slightly.
  6. Exports contributed 1.22% to the overall growth rate, down -0.26% from the previous report.
  7. And imports now subtracted -0.24% from the headline number (compared to -0.15% previously reported).
  8. The annualized growth rate for the “real final sales of domestic product” decreased to 2.23% (down from the 2.45% in the prior 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 much slower) buildup of inventories.
  9. And as mentioned above, real per-capita annual disposable income is now reported to have contracted very slightly during the quarter – dropping $2. But that number is down a much more material $324 per year (roughly 1%) from the fourth quarter of 2012 (before the FICA rates normalized).

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:

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

At face value this report shows economic growth that was weakening quarter-to-quarter in the fourth quarter of 2013. And the downward revisions in this report (from a “first estimate” that the BEA freely admits is always something of an educated guess) were broadly based, indicating that the incoming firmer numbers have been consistently surprising the BEA to the downside.

The BEA has a history of substantial “real-time” misses at the commencement of a downturn in the economy – always as the result of an overly optimistic reading of a rapidly deteriorating situation. This also tells us something about their methodologies – which to some cynics (including us) seem to be less about actual timely measurements of the economy and more about modeled projections of what they think the economy should be doing based on data that is some months old.

In this context it is useful to recall the BEA’s historic track record on reporting the growth rate for the first full quarter of the last recession – the “Great Recession” that the National Bureau of Economic Research (NBER) says commenced in December 2007. In their second estimate of the growth rate for the first quarter of 2008 – the first full quarter of the NBER’s recession – the BEA reported roughly six years ago that:

“Real gross domestic product – the output of goods and services produced by labor and property located in the United States – increased at an annual rate of 0.9 percent in the first quarter of 2008, according to preliminary estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.6 percent.”

In other words, the BEA was reporting then (May 2008) that the economy had improved relative to the prior quarter. In fact their newly revised estimate was even better than the prior estimate for 1Q-2008 published a month earlier, which at +0.6% was flat when compared to 4Q-2007. And the following month they would report a yet even better headline number (+1.0% annualized GDP growth rate). When we put the BEA estimates for 1Q-2008 into a table showing how they changed over time it looks something like this:

BEA’s Changing View of First Quarter 2008 GDP

If anyone missed the key point: in the table above all of the BEA’s reported growth rates are for the same quarter, the first quarter of 2008 – the first full quarter of the last recession. The only difference is the lag time between the close of the quarter and the BEA’s reporting of its growth. And if the scope of the revisions somehow escaped you, they missed the annualized growth rate in “real-time” by a staggeringly optimistic 3.3%!

Given the BEA’s “real-time” track record, it is possible that the US economy is currently in a state of flux — with the weakening hinted at in this report both more pervasive and dynamic than the BEA currently understands. Unfortunately if that is true, the official GDP numbers will be among the last places to watch a downside event unfold.

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