Consumer Metrics Institute News

BEA Estimates 1st Quarter 2013 GDP Growing at 2.5% Annual Rate

contact@consumerindexes.com (Consumer Metrics Institute, Inc.) — Fri, 26 Apr 2013 00:00:00 -0500

(If the tables or charts in this report do not seem to be presented correctly, please click here or navagate to http://www.consumerindexes.com/2013-04-26_commentary.html to see this commentary as a Web Page.)

In their first estimate of the US GDP for the first quarter of 2013, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a 2.50% annualized rate, some 2.12% better than the 0.38% growth rate for the prior quarter.

Although the headline number itself indicates moderate mid-cycle growth, the details within the BEA's report cast at best a mixed message for the overall health of the economy. For example: although the overall contribution from consumer spending was up, it came mainly from spending on services (boosting the headline number by 1.46%, and principally spent on non-discretionary rents and utilities), with consumer spending for goods contributing to the headline number at a more modest 0.78% (down about -0.24% from the prior quarter). And although fixed investments were still contributing a positive 0.53% to the headline number, that was down over a full percent from the prior quarter. In fact, inventories swinging back to growth (after contracting during the prior quarter) arguably provided all of the quarter-to-quarter improvement in the headline growth rate.

For this set of revisions the BEA assumed annualized net aggregate inflation of 1.20%. In contrast, during the first quarter the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) recorded a 2.10% annualized inflation rate. As a reminder: an understatement of assumed inflation increases the reported headline number -- and in this case the BEA's relatively low "deflater" (nearly a full percent below the CPI-U) boosted 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 much more modest 1.63%.

Finally, one of the bright spots in the prior quarter's data (the previously reported substantial improvements in real per capita disposable income) completely reversed in this report -- confirming that the fourth quarter's upward surge in real per capita disposable income was merely an artifact of payroll "gaming" in anticipation of increasing tax rates. In fact, real per capita disposable income contracted during the quarter at an astonishing -5.88% annualized rate -- crashing back to levels that are below where they were two years ago. And, as expected, consumers offset the "new" FICA rate increase of 2% by reducing their savings rate by -2.1%. Although this arguably propped up consumer spending during the quarter, it is important to note that that spending support came in spite of a sharp contraction in sustainable household incomes.

Among the notable items in the report:

-- The contribution of consumer expenditures for goods to the headline number weakened to 0.78% (down from 1.02% in the fourth quarter of 2012).

-- The contribution made by consumer services soared to 1.46% (up 1.19% from the previous quarter). As noted above this increase came from higher spending for non-discretionary rents and utilities.

-- The growth rate contribution from private fixed investments dropped sharply to 0.53% (from 1.69% in the previous quarter).

-- Inventories grew, raising the headline number by 1.03% (reversing their drag on the previous quarter's headline of -1.52%).

-- The previous quarter's sharp contraction in government spending moderated somewhat, and it is now removing -0.80% from the headline number (an improvement of 0.61% from the -1.41% drag reported for the prior quarter -- and almost all of that "improvement" came from Federal defense spending).

-- Improving exports added 0.40% to the headline number (perfectly reversing the -0.40% drag reported for fourth quarter of 2012).

-- But that good news was more than completely offset by a significant drop in the contribution from imports -- which removed -0.90% from the headline number after adding +0.73% in the prior quarter. Since this drag on the headline number can come from increasing domestic demand for foreign goods it is often spun as a sign of a strengthening economy, although it can often be merely a sign of rising commodity prices.

-- The annualized growth rate of "real final sales of domestic product" dropped to 1.47% (from 1.90% in the prior quarter). This is the BEA's "bottom line" measurement of the economy, and the -0.43% erosion in that growth rate is a consequence of the surging inventories.

-- And real per-capita disposable income took a monumental hit: it dropped by an annualized $498 from quarter to quarter, while personal savings plunged to 2.6% (dropping 2.1% from the 4.7% recorded in the prior quarter). Real per-capita disposable income is now down $123 annually from 1Q-2011 -- a full two years ago.

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 Table

	Total GDP	=	C	+	I	+	G	+	(X-M)
Annual $ (trillions)	$16.0	=	$11.4	+	$2.2	+	$3.0	+	$-0.5
% of GDP	100.0%	=	71.0%	+	13.5%	+	18.9%	+	-3.4%
Contribution to GDP Growth %	2.50%	=	2.24%	+	1.56%	+	-0.80%	+	-0.50%

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:

Quarterly Changes in % Contributions to GDP

	1Q-2013	4Q-2012	3Q-2012	2Q-2012	1Q-2012	4Q-2011	3Q-2011	2Q-2011	1Q-2011	4Q-2010	3Q-2010	2Q-2010	1Q-2010
Total GDP Growth	2.50%	0.38%	3.09%	1.26%	1.97%	4.10%	1.28%	2.48%	0.08%	2.39%	2.60%	2.24%	2.33%
Consumer Goods	0.78%	1.02%	0.85%	0.08%	1.11%	1.29%	0.33%	-0.22%	1.27%	1.78%	0.86%	0.76%	1.18%
Consumer Services	1.46%	0.27%	0.26%	0.99%	0.61%	0.16%	0.85%	0.92%	0.95%	1.06%	0.88%	1.05%	0.54%
Fixed Investment	0.53%	1.69%	0.12%	0.56%	1.18%	1.19%	1.75%	1.39%	-0.14%	0.87%	-0.10%	1.58%	-0.10%
Inventories	1.03%	-1.52%	0.73%	-0.46%	-0.39%	2.53%	-1.07%	0.01%	-0.54%	-1.61%	1.97%	0.07%	2.23%
Government	-0.80%	-1.41%	0.75%	-0.14%	-0.60%	-0.43%	-0.60%	-0.16%	-1.49%	-0.94%	-0.06%	0.59%	-0.69%
Exports	0.40%	-0.40%	0.27%	0.72%	0.60%	0.21%	0.83%	0.56%	0.75%	1.24%	1.18%	1.14%	0.70%
Imports	-0.90%	0.73%	0.11%	-0.49%	-0.54%	-0.85%	-0.81%	-0.02%	-0.72%	-0.01%	-2.13%	-2.95%	-1.53%
Real Final Sales	1.47%	1.90%	2.36%	1.72%	2.36%	1.57%	2.35%	2.47%	0.62%	4.00%	0.63%	2.17%	0.10%

Summary

On the surface a 2.50% annualized growth rate at nearly full four years into a recovery is good news -- and a growth rate that many other global economies would currently be pleased to be reporting. And looking at the details provides us with some reasons for optimism:

-- Consumer spending was sustained in spite of tax increases,

-- Fixed investments continued to grow,

-- Exports swung back to growth after a quarter of contraction.

But two major components within the data continue to suggest reasons for caution:

-- Inventories are growing once again, with the quarter-to-quarter swing in inventories (+2.55%) contributing more than the entire improvement in the headline number,

-- Real per capita disposable incomes took a major hit, and consumers had to dip into savings to sustain spending levels in the face of increasing taxes.

Clearly the last two items are cause for concern for the long term health of the economy. We have argued before that an ongoing contraction in real per capita disposable income has been the most critical feature of the BEA data releases during the past several years -- and we see no reason to change that argument now.

BEA Revises 4th Quarter 2012 GDP Upward to a 0.38% Annual Growth Rate

contact@consumerindexes.com (Consumer Metrics Institute, Inc.) — Thu, 28 Mar 2013 00:00:00 -0500

In their third 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 0.38% annualized rate, roughly 2.7% worse than the 3.09% growth rate that they recorded for the prior quarter. The new number is 0.24% 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.

Although the headline number shows both an upward revision and positive growth, the 0.38% number remains not statistically distinguishable from a stalled economy. The positive revisions came primarily from fixed investments, with "less negative" exports providing an additional boost. Consumer activities were marginally weaker than previously reported, and governmental spending continued to shrink.

For this set of revisions the BEA assumed annualized net aggregate inflation of 0.97%. 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 1.51% 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 1.35% 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 +5.36%. It should be noted that more than half of this increase in disposable income was offset by increased personal savings (up about $131 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 slightly to 1.02% (from 1.03% in the previous estimate).

-- The contribution made by consumer services dropped by over a third to 0.27% (down from 0.44% previously reported).

-- The growth rate contribution from private fixed investments was up sharply to 1.69% (from 1.36% in the previous report), providing essentially all of the upward movement in the headline number.

-- Inventory draw-downs moderated slightly, removing -1.52% from the headline number (-1.55% previously). 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 contraction in government spending became even slightly more negative, removing -1.41% from the headline number.

-- Declining exports removed -0.40% from the headline number (an improvement, however, of +0.15% from the -0.55% negative contribution previously reported). The net drag from exports continues to be consistent with a generally weakening global economy, and is a trend we might expect to have been continuing in the current quarter.

-- And reduced imports actually added +0.73% to the headline growth rate (down slightly from the 0.79% 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 1.90%, still some -0.46% below the prior quarter. This is the BEA's "bottom line" measurement of the economy.

-- And real per-capita disposable income was revised downward a net $35 to $33,138 per year (although that revised number is still about $430 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:

GDP Components Table

	Total GDP	=	C	+	I	+	G	+	(X-M)
Annual $ (trillions)	$15.9	=	$11.2	+	$2.1	+	$3.0	+	$-0.5
% of GDP	100.0%	=	70.9%	+	13.2%	+	19.2%	+	-3.3%
Contribution to GDP Growth %	0.38%	=	1.29%	+	0.17%	+	-1.41%	+	0.33%

Quarterly Changes in % Contributions to GDP

	4Q-2012	3Q-2012	2Q-2012	1Q-2012	4Q-2011	3Q-2011	2Q-2011	1Q-2011	4Q-2010	3Q-2010	2Q-2010	1Q-2010	4Q-2009	3Q-2009	2Q-2009	1Q-2009
Total GDP Growth	0.38%	3.09%	1.26%	1.97%	4.10%	1.28%	2.48%	0.08%	2.39%	2.60%	2.24%	2.33%	4.03%	1.46%	-0.32%	-5.25%
Consumer Goods	1.02%	0.85%	0.08%	1.11%	1.29%	0.33%	-0.22%	1.27%	1.78%	0.86%	0.76%	1.18%	-0.10%	1.68%	-0.46%	0.06%
Consumer Services	0.27%	0.26%	0.99%	0.61%	0.16%	0.85%	0.92%	0.95%	1.06%	0.88%	1.05%	0.54%	0.09%	-0.18%	-0.75%	-1.12%
Fixed Investment	1.69%	0.12%	0.56%	1.18%	1.19%	1.75%	1.39%	-0.14%	0.87%	-0.10%	1.58%	-0.10%	-0.69%	-0.32%	-2.49%	-4.73%
Inventories	-1.52%	0.73%	-0.46%	-0.39%	2.53%	-1.07%	0.01%	-0.54%	-1.61%	1.97%	0.07%	2.23%	4.55%	0.19%	-1.03%	-2.29%
Government	-1.41%	0.75%	-0.14%	-0.60%	-0.43%	-0.60%	-0.16%	-1.49%	-0.94%	-0.06%	0.59%	-0.69%	0.23%	0.79%	1.94%	0.37%
Exports	-0.40%	0.27%	0.72%	0.60%	0.21%	0.83%	0.56%	0.75%	1.24%	1.18%	1.14%	0.70%	2.55%	1.48%	0.10%	-3.78%
Imports	0.73%	0.11%	-0.49%	-0.54%	-0.85%	-0.81%	-0.02%	-0.72%	-0.01%	-2.13%	-2.95%	-1.53%	-2.60%	-2.18%	2.37%	6.24%
Real Final Sales	1.90%	2.36%	1.72%	2.36%	1.57%	2.35%	2.47%	0.62%	4.00%	0.63%	2.17%	0.10%	-0.52%	1.27%	0.71%	-2.96%

Summary

Despite the modest growth reported in this release, there remain reasons to be cautious about the economy:

-- Even as revised this data represents an economy that is growing at a rate some 2.7% less than during the prior quarter (the greatest downward quarter-to-quarter change since the fourth quarter of 2008).

-- As we have mentioned before, 4Q-2012 may be the quarter that in retrospect will 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 and accelerating contractions in global trade. If all other components of the economy stay the same, those factors alone could remove well over 2% 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, and weakening exports could easily reduce the headline number by another 1%.

-- And lastly, this third estimate had only one significant revision -- the upward restatement of fixed investments, which numerically provides more than the entire boost to the headline number. And all of that revision was in non-residential construction -- i.e., commercial real estate, which has grown back to its highest "real" level of activity since the second quarter of 2009.

Judging from that number alone someone might conclude that there is a shortage of vacant office and retail space in the US. On the other hand, we might just be seeing the first tangible signs of a ZIRP (zero interest rate policy) induced "mis-allocation of capital." Presumably there are people who are really good at building commercial structures (whether they are really needed or not), and apparently they have access to essentially free money. We have recently seen how that same scenario has played out in China, where empty shopping centers and empty cities have become too obvious to ignore.

We have wondered before if we are experiencing the Japanization of the US economy. Maybe commercial real estate is instead heading towards China.

BEA Revises 4th Quarter 2012 GDP Upward to a 0.14% Annual Growth Rate

contact@consumerindexes.com (Consumer Metrics Institute, Inc.) — Thu, 28 Feb 2013 00:00:00 -0500

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.

GDP Components Table

	Total GDP	=	C	+	I	+	G	+	(X-M)
Annual $ (trillions)	$15.9	=	$11.23	+	$2.1	+	$3.0	+	$-0.5
% of GDP	100.0%	=	71.0%	+	13.1%	+	19.2%	+	-3.4%
Contribution to GDP Growth %	0.14%	=	1.47%	+	-0.19%	+	-1.38%	+	0.24%

Quarterly Changes in % Contributions to GDP

	4Q-2012	3Q-2012	2Q-2012	1Q-2012	4Q-2011	3Q-2011	2Q-2011	1Q-2011	4Q-2010	3Q-2010	2Q-2010	1Q-2010	4Q-2009	3Q-2009	2Q-2009	1Q-2009
Total GDP Growth	0.14%	3.09%	1.26%	1.97%	4.10%	1.28%	2.48%	0.08%	2.39%	2.60%	2.24%	2.33%	4.03%	1.46%	-0.32%	-5.25%
Consumer Goods	1.03%	0.85%	0.08%	1.11%	1.29%	0.33%	-0.22%	1.27%	1.78%	0.86%	0.76%	1.18%	-0.10%	1.68%	-0.46%	0.06%
Consumer Services	0.44%	0.26%	0.99%	0.61%	0.16%	0.85%	0.92%	0.95%	1.06%	0.88%	1.05%	0.54%	0.09%	-0.18%	-0.75%	-1.12%
Fixed Investment	1.36%	0.12%	0.56%	1.18%	1.19%	1.75%	1.39%	-0.14%	0.87%	-0.10%	1.58%	-0.10%	-0.69%	-0.32%	-2.49%	-4.73%
Inventories	-1.55%	0.73%	-0.46%	-0.39%	2.53%	-1.07%	0.01%	-0.54%	-1.61%	1.97%	0.07%	2.23%	4.55%	0.19%	-1.03%	-2.29%
Government	-1.38%	0.75%	-0.14%	-0.60%	-0.43%	-0.60%	-0.16%	-1.49%	-0.94%	-0.06%	0.59%	-0.69%	0.23%	0.79%	1.94%	0.37%
Exports	-0.55%	0.27%	0.72%	0.60%	0.21%	0.83%	0.56%	0.75%	1.24%	1.18%	1.14%	0.70%	2.55%	1.48%	0.10%	-3.78%
Imports	0.79%	0.11%	-0.49%	-0.54%	-0.85%	-0.81%	-0.02%	-0.72%	-0.01%	-2.13%	-2.95%	-1.53%	-2.60%	-2.18%	2.37%	6.24%
Real Final Sales	1.69%	2.36%	1.72%	2.36%	1.57%	2.35%	2.47%	0.62%	4.00%	0.63%	2.17%	0.10%	-0.52%	1.27%	0.71%	-2.96%

Summary

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.

BEA Reports 4th Quarter 2012 GDP Contracting at -0.14% Annual Rate

contact@consumerindexes.com (Consumer Metrics Institute, Inc.) — Wed, 30 Jan 2013 00:00:00 -0500

In their first (or "advance") estimate of the US GDP for the fourth quarter of 2012 the Bureau of Economic Analysis (BEA) found that the economy was shrinking at a -0.14% annualized rate, over 3% worse than the 3.09% growth rate that they recorded for the prior quarter.

The contraction was driven primarily by dramatic reversals to the prior one-quarter spikes in government spending and inventory growth, which sharply improved the final headline number for the 3rd quarter. The reversals of those two line items reduced the headline number by over 4%. This report also showed substantial weakening in exports, although that was also offset somewhat by a softening of imports.

Despite the gloom in the headline number, there were actually some positive signs in the details of the report. The consumer spending portions of the report were actually slightly stronger than reported for the prior quarter, with the modest upturn in consumer activity adding over +0.40% to the headline number. And commercial fixed investment improved enough to provide a 1% boost to the overall economic growth rate.

For this set of revisions the BEA assumed annualized net aggregate inflation of 0.60%. 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 modest (but positive) 1.21% growth rate.

And the previous ongoing contraction of real per capita disposable income was reported to have come to an end, with the annualized growth rate for per capita disposable income now reported to be a very healthy +6.03%. This decidedly good news was somewhat offset by a substantial surge in savings (up about $140 billion per year, or roughly 1% of GDP) as households remained cautious in their spending habits. It should also be remembered that the fully restored FICA deductions will take back some of that disposable income gain during 1Q-2013 -- which may also explain the cautious expenditures.

Among the notable items in the report:

-- The contribution of consumer expenditures for goods to the headline number was revised upward to 1.08% (from 0.85% in the previous quarter).

-- The contribution made by consumer services increased to 0.44% -- up from the 0.26% in the previous period.

-- The growth rate contribution from private fixed investments was up sharply to 1.19% (from 0.12% in the prior quarter).

-- Inventory draw-downs removed -1.27% from the headline number, down a full 2% from the positive 0.73% contribution during the prior quarter. 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 the sharp reversal (e.g., uncorrected oil pricing anomalies or genuine changes to supply chain stocks and/or manufacturing schedules).

-- A sharp decrease in government spending removed -1.33% from the headline number. This change more than fully reversed the prior quarter's surge of spending in the same sector. Nearly all of this swing was in defense spending, where all of the surge in 3Q-2012 was fully reversed in 4Q-2012. The third quarter boost to the headline number was simply brought forward from the fourth quarter. State and local government also slipped back into contraction, removing an aggregate -0.08% from the headline annualized growth rate.

-- Declining exports removed -0.81% from the headline number (sharply down from the +0.27% positive contribution during the prior quarter). Unlike the prior quarter this export picture finally seems to be reflecting the generally weakening global economy.

-- And reduced imports actually added +0.56% to the headline growth rate (up from the 0.11% in the previous quarter). 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 downward to 1.13%, some -1.23% below the prior quarter. This is the BEA's "bottom line" measurement of the economy.

-- And perhaps the best news in a long time: real per-capita disposable income was up $482 annually during the quarter (to $33,173 per year). 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.

GDP Components Table

	Total GDP	=	C	+	I	+	G	+	(X-M)
Annual $ (trillions)	$15.8	=	$11.2	+	$2.1	+	$3.1	+	$-0.6
% of GDP	100.0%	=	71.1%	+	13.2%	+	19.3%	+	-3.5%
Contribution to GDP Growth %	-0.14%	=	1.52%	+	-0.08%	+	-1.33%	+	-0.25%

Quarterly Changes in % Contributions to GDP

	4Q-2012	3Q-2012	2Q-2012	1Q-2012	4Q-2011	3Q-2011	2Q-2011	1Q-2011	4Q-2010	3Q-2010	2Q-2010	1Q-2010	4Q-2009	3Q-2009	2Q-2009	1Q-2009
Total GDP Growth	-0.14%	3.09%	1.26%	1.97%	4.10%	1.28%	2.48%	0.08%	2.39%	2.60%	2.24%	2.33%	4.03%	1.46%	-0.32%	-5.25%
Consumer Goods	1.08%	0.85%	0.08%	1.11%	1.29%	0.33%	-0.22%	1.27%	1.78%	0.86%	0.76%	1.18%	-0.10%	1.68%	-0.46%	0.06%
Consumer Services	0.44%	0.26%	0.99%	0.61%	0.16%	0.85%	0.92%	0.95%	1.06%	0.88%	1.05%	0.54%	0.09%	-0.18%	-0.75%	-1.12%
Fixed Investment	1.09%	0.12%	0.56%	1.18%	1.19%	1.75%	1.39%	-0.14%	0.87%	-0.10%	1.58%	-0.10%	-0.69%	-0.32%	-2.49%	-4.73%
Inventories	-1.27%	0.73%	-0.46%	-0.39%	2.53%	-1.07%	0.01%	-0.54%	-1.61%	1.97%	0.07%	2.23%	4.55%	0.19%	-1.03%	-2.29%
Government	-1.33%	0.75%	-0.14%	-0.60%	-0.43%	-0.60%	-0.16%	-1.49%	-0.94%	-0.06%	0.59%	-0.69%	0.23%	0.79%	1.94%	0.37%
Exports	-0.81%	0.27%	0.72%	0.60%	0.21%	0.83%	0.56%	0.75%	1.24%	1.18%	1.14%	0.70%	2.55%	1.48%	0.10%	-3.78%
Imports	0.56%	0.11%	-0.49%	-0.54%	-0.85%	-0.81%	-0.02%	-0.72%	-0.01%	-2.13%	-2.95%	-1.53%	-2.60%	-2.18%	2.37%	6.24%
Real Final Sales	1.13%	2.36%	1.72%	2.36%	1.57%	2.35%	2.47%	0.62%	4.00%	0.63%	2.17%	0.10%	-0.52%	1.27%	0.71%	-2.96%

Summary

There are several quarter-to-quarter "take aways" from the report:

-- As detailed above, the contraction was driven primarily by dramatic (but not unexpected) reversals to the one-quarter spikes in government spending and inventory growth, which sharply (and conveniently) improved the headline number just prior to the November election. At best both of those one-quarter binges simply brought zero-sum economic activity forward by a quarter, and at worse we will see both of these surges later treated as data anomalies that disappear in future revisions.

-- For those of us who follow these numbers closely (and perhaps foolishly try to make some longer-term sense of them), the inexplicable economic surge reported for the third quarter has now at least reversed, and the general weakening pattern previously recorded for 2012 seems to have been confirmed.

-- The consumer data was actually a modest bright spot. Per-capita disposable income increased substantially, as did personal consumption expenditures for both goods and services. Similarly commercial fixed investment expenditures improved.

But there are several longer term issues with the data:

-- We have mentioned before that the BEA is notoriously poor at recording turning points in the economy in "real time." The first quarter of 2008 was a classic example, initially being reported in "real time" as yet another quarter of sustained growth before being revised downward several times over some 40 months to become the first quarter of contraction leading into what we now call the "Great Recession." We fully expect that ultimately the surprising economic upturn seen in the 3Q-2012 data will largely vanish in future revisions.

-- And in truth it is hard to look at these new numbers without at least some cynical thoughts about the reported numbers for the prior quarter. We were frankly astonished when the final numbers for the third quarter came in at a 3.09% "full recovery" growth rate, driven largely by unexplained increases in Federal spending, particularly in the Department of Defense (DOD) -- the timing of which was completely controlled by an Administration in serious need of positive pre-election economic headlines. The annualized rates of growth for defense spending rose to over 15% in 3Q-2012, only to magically reverse to a -15% annualized contraction rate in 4Q-2012 -- after the polls had closed.

To that last point: arguably the DOD was simply moving materiel acquisitions forward in anticipation/avoidance of "fiscal cliff" sequesters, with the economic impact of the contracting binge a mere side effect of bureaucratic hoarding. We should all hope that the context of any such timing shenanigans were more budgetary than political in nature.

BEA Raises 3rd Quarter 2012 GDP Growth Estimate Once Again to 3.09%

contact@consumerindexes.com (Consumer Metrics Institute, Inc.) — Thu, 20 Dec 2012 00:00:00 -0500

In their third (and "final") estimate of the US GDP for the third quarter of 2012 the Bureau of Economic Analysis (BEA) found that the economy was growing at a 3.09% annualized rate, an upward revision of +0.42% from the previously published estimate for that quarter and 1.83% better than the second quarter of 2012.

The improved headline number came primarily from substantial upward revisions to exports, consumer services and government expenditures, and a decrease in imports. Minor upward revisions in consumer goods and fixed investments was offset by a downward revision to inventories. The annualized growth rate for the BEA's bottom line "real final sales of domestic product" was also revised up significantly to 2.36%.

Perhaps most surprisingly, for the first time since the fourth quarter of 2009 real state and local government expenditures are now reported to be growing. In fact, surging governmental expenditures at all levels contributed +0.75% to the headline number -- with nominal defense spending alone growing at an astounding annualized 13.9% rate.

For this set of revisions the BEA assumed annualized net aggregate inflation of 2.74%. In contrast, during the third quarter the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) recorded a substantially higher 4.98% annualized inflation rate. As a reminder: an understatement of assumed inflation improves the reported headline number -- and in this case the BEA's low "deflater" (more than 2% below the CPI-U) significantly boosted 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 much weaker 0.93%.

And the contraction rate for real per capita disposable income is now reported to have moderated slightly (although it is still reported to be contracting at a -0.24% annualized rate). During the past 6 quarters (18 months) real per capita disposable income has shrunk by $73 per year -- with $20 of that loss occurring during the past quarter. Once again the combination of increasing consumer expenditures coupled with shrinking disposable income raises concerns about the sustainability of the current recovery.

Among the notable items in the report:

-- The contribution of consumer expenditures for goods to the headline number was revised upward to 0.85% (from 0.83% in the previous report).

-- The contribution made by consumer services increased to 0.26% -- up from the 0.16% in the previous report.

-- The growth rate contribution from private fixed investments was largely unchanged at 0.12% (up slightly from 0.10% in the prior report).

-- The contribution from inventories remained relatively high (+0.73%), providing about a quarter of the headline number. Over time inventory growth should be a nearly zero-sum game, and presumably this quarter's growth from inventory building will be offset in future quarters by reduced production to shrink excessive inventories.

-- From a long term perspective, the biggest change in the third quarter's economy came from sharply increasing governmental expenditures. Growth in government spending at all levels is now reported to have added +0.75% to the headline number after subtracting -0.60% as recently as the first quarter of 2012.

-- Exports added more than a quarter of a percent to the headline number (+0.27%). The improving export picture seems to imply an improving global economy despite any number of reports to the contrary.

-- And reduced imports actually added +0.11% to the headline growth rate (a change in direction from the -0.02% previously reported).

-- The annualized growth rate of "real final sales of domestic product" was revised sharply upward to 2.36%, some 0.46% above the prior report and now at the same level as reported for the first quarter of 2012.

-- Real per-capita disposable income was down $20 during the quarter (to $32,691 per year). This is down $73 from the $32,764 reported for the 1st quarter of 2011, now some 6 quarters ago. The reported annualized contraction rate of -0.24% benefits from the relatively low deflaters used by the BEA. If per-capita disposable income were "deflated" using the BLS CPI-U (which presumably is what consumers actually experience when spending their incomes) the annualized contraction rate for per capita consumer spending power is more like -3.65%.

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 Table

	Total GDP	=	C	+	I	+	G	+	(X-M)
Annual $ (trillions)	$15.8	=	$11.2	+	$2.1	+	$3.1	+	$-0.5
% of GDP	100.0%	=	70.6%	+	13.2%	+	19.6%	+	-3.3%
Contribution to GDP Growth %	3.09%	=	1.11%	+	0.85%	+	0.75%	+	0.38%

Quarterly Changes in % Contributions to GDP

	3Q-2012	2Q-2012	1Q-2012	4Q-2011	3Q-2011	2Q-2011	1Q-2011	4Q-2010	3Q-2010	2Q-2010	1Q-2010	4Q-2009	3Q-2009	2Q-2009	1Q-2009
Total GDP Growth	3.09%	1.26%	1.97%	4.10%	1.28%	2.48%	0.08%	2.39%	2.60%	2.24%	2.33%	4.03%	1.46%	-0.32%	-5.25%
Consumer Goods	0.85%	0.08%	1.11%	1.29%	0.33%	-0.22%	1.27%	1.78%	0.86%	0.76%	1.18%	-0.10%	1.68%	-0.46%	0.06%
Consumer Services	0.26%	0.99%	0.61%	0.16%	0.85%	0.92%	0.95%	1.06%	0.88%	1.05%	0.54%	0.09%	-0.18%	-0.75%	-1.12%
Fixed Investment	0.12%	0.56%	1.18%	1.19%	1.75%	1.39%	-0.14%	0.87%	-0.10%	1.58%	-0.10%	-0.69%	-0.32%	-2.49%	-4.73%
Inventories	0.73%	-0.46%	-0.39%	2.53%	-1.07%	0.01%	-0.54%	-1.61%	1.97%	0.07%	2.23%	4.55%	0.19%	-1.03%	-2.29%
Government	0.75%	-0.14%	-0.60%	-0.43%	-0.60%	-0.16%	-1.49%	-0.94%	-0.06%	0.59%	-0.69%	0.23%	0.79%	1.94%	0.37%
Exports	0.27%	0.72%	0.60%	0.21%	0.83%	0.56%	0.75%	1.24%	1.18%	1.14%	0.70%	2.55%	1.48%	0.10%	-3.78%
Imports	0.11%	-0.49%	-0.54%	-0.85%	-0.81%	-0.02%	-0.72%	-0.01%	-2.13%	-2.95%	-1.53%	-2.60%	-2.18%	2.37%	6.24%
Real Final Sales	2.36%	1.72%	2.36%	1.57%	2.35%	2.47%	0.62%	4.00%	0.63%	2.17%	0.10%	-0.52%	1.27%	0.71%	-2.96%

Summary

Nearly all of the detail in this revised report showed some improvement from the prior estimate. And the roughly 3% headline growth rate is well within the range of what we should be expecting some 13 quarters into an economic "recovery." However, removing the impact of the governmental spending surge, growing inventories and foreign trade removes over three-fifths of the apparent growth.

Recapping the issues that merit caution moving forward:

-- About a quarter of the headline growth rate came from a surge in governmental spending.

-- Inventory growth also contributed about a quarter of the headline growth rate. The BEA's inventory valuations are notoriously dependent on the deflators used, and the wild fluctuation of these numbers from earlier reports raises at least some concerns about their credibility. But even assuming that the reported numbers are correct, substantial growth in current inventories does not bode well for factory production schedules in future quarters.

-- The continued contraction of per-capita disposable income means that households are under sustained pressure. Any growth in consumer spending is not coming from fatter paychecks -- it is coming instead from other sources, including refinancing, strategic defaults, reduced personal savings (which now reportedly shrank by $25.9 billion during the quarter) and increased student loans.