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Consumers Carry Weak GDP Number Out of the Red

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By Rick Davis, Consumer Metrics Institute September 29, 2016 - BEA Revises 2nd Quarter 2016 GDP Growth Upward to 1.42% Follow up: In their third and final estimate of the US GDP for the second quarter of 2016, the Bureau of Economic Analysis (BEA) reported that the growth rate was +1.42%, up +0.33% from their previous estimate and up +0.59% from the prior quarter. Most of the improvement in the headline number came from a +0.24% upward revision in commercial fixed investment. None of the other revisions were statistically significant. Despite the upward revision to commercial fixed investments, that line item remained in contraction at a -0.18% annualized rate. Inventories also contracted materially (at a -1.16% annualized rate). Consumer spending growth continues to provide the vast majority of the net growth, with spending on consumer goods contributed +1.51% to the headline, while spending on consumer services provided another +1.37% (a combined +2.88% contribution, more that twice the net headline number). The BEA's treatment of inventories can introduce noise and seriously distort the headline number over short terms -- which the BEA admits by also publishing a secondary headline that excludes the impact of inventories. The BEA's "bottom line" (their "Real Final Sales of Domestic Product") was a +2.58% growth rate, up 1.34% from 1Q-2016.

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by Rick Davis, Consumer Metrics Institute

September 29, 2016 - BEA Revises 2nd Quarter 2016 GDP Growth Upward to 1.42%

Consumers Carry Weak GDP Number Out of the Red

Follow up:

In their third and final estimate of the US GDP for the second quarter of 2016, the Bureau of Economic Analysis (BEA) reported that the growth rate was +1.42%, up +0.33% from their previous estimate and up +0.59% from the prior quarter. Most of the improvement in the headline number came from a +0.24% upward revision in commercial fixed investment. None of the other revisions were statistically significant.

Despite the upward revision to commercial fixed investments, that line item remained in contraction at a -0.18% annualized rate. Inventories also contracted materially (at a -1.16% annualized rate). Consumer spending growth continues to provide the vast majority of the net growth, with spending on consumer goods contributed +1.51% to the headline, while spending on consumer services provided another +1.37% (a combined +2.88% contribution, more that twice the net headline number).

The BEA's treatment of inventories can introduce noise and seriously distort the headline number over short terms -- which the BEA admits by also publishing a secondary headline that excludes the impact of inventories. The BEA's "bottom line" (their "Real Final Sales of Domestic Product") was a +2.58% growth rate, up 1.34% from 1Q-2016.

Real annualized household disposable income was revised downward $19 in this report, to an annualized $38,976 (in 2009 dollars). The household savings rate remained unchanged at 5.7% (which is down from a 6.1% savings rate in the prior quarter).

For this revision the BEA assumed an effective annualized deflator of 2.29%. During the same quarter (April 2016 through June 2016) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was 3.42%. Under estimating inflation results in correspondingly optimistic growth rates, and if the BEA's "nominal" data was deflated using CPI-U inflation information the headline growth number would have been significantly lower, at a +0.31% growth rate.

Among the notable items in the report :

  • The headline contribution from consumer expenditures for goods decreased slightly to a +1.51% growth rate (representing a substantial +1.26% improvement from the prior quarter).
  • The contribution to the headline from consumer spending on services also went down to +1.37% (although it is still up +0.51% from the prior quarter). The combined consumer contribution to the headline number was +2.88%, up a hearty +1.77% from 1Q-2016.
  • The headline contribution from commercial private fixed investments remained negative at -0.18%. Although this is up +0.24% from the previous report, it is still down -0.03% from the prior quarter.
  • The contribution from inventories remained negative, subtracting -1.16% from the headline number, down -0.75% from 1Q-2016. It bears repeating that the BEA's inventory numbers are exceptionally noisy, subject to significant distortions/anomalies caused by commodity price swings while representing a zero reverting (and long term zero sum) series.
  • The contribution from governmental spending softened once again, subtracting -0.30% from the headline. This weakening was primarily due to decreased capital spending at state and local levels, with Federal spending essentially flat.
  • The contribution to the headline number from exports improved slightly to +0.21% (up +0.30% from the prior quarter).
  • Imports subtracted -0.03% from the headline number, down -0.12% from the prior quarter.
  • The "real final sales of domestic product" improved to +2.58%, which is still up +1.34% from the prior quarter. This is the BEA's "bottom line" measurement of the economy and it excludes the reported inventory contraction.
  • As mentioned above, real per-capita annual disposable income was revised downward $19 in this report (and is now up $132 from the prior quarter). The household savings rate was unchanged, and it remains down from the prior quarter. Most of the increased quarter-to-quarter consumer spending came from that decreased savings rate. It is important to keep this line item in perspective : real per-capita annual disposable income is up only +6.27% in aggregate since the second quarter of 2008 -- a meager annualized +0.76% growth rate over the past 32 quarters.

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 :

Consumers Carry Weak GDP Number Out of the Red

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 :

Consumers Carry Weak GDP Number Out of the Red

Summary and Commentary

The only significant revision in this report involves a softening of the previously reported deep contraction in commercial fixed investment. The rest of the changes in this report were merely statistical noise. The report continued to show a US economy moving forward at modest 1.42% growth rate.

The key "big picture" items in this report include the following :

  • Most things not consumer related remained in contraction. It is a decently positive report that continues to mask commercial weakness.
  • Although consumer spending growth was relatively strong, most of that increased spending ultimately came from savings -- and not from improved disposable income.
  • The majority of the reported growth disappears when a third party deflator (the BLS CPI-U) is applied to the nominal data.

The next report (for the third quarter of 2016) could -- in theory -- be very interesting. But the timing -- 11 days before the Presidential election -- argues against any startling numbers, however accurate they may be. At similar points in both 2008 and 2012 we saw "steady as we go" numbers that were 1) subsequently revised downward, and 2) artificially boosted by a Federal fiscal year-end "spend-every-last-budgeted-penny" spree that merely brought apparent growth forward at the ultimate expense of the respective fourth quarters.

We shouldn't expect anything less in 2016.

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