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Understated Inflation Produces ‘Unreal’ GDP Growth Double Real Growth

Summary:
Posted on 26 August 2021 Written by Rick Davis, Consumer Metrics Institute BEA Revises Second Quarter 2021 GDP Growth Upward to 6.56%In their second estimate of the US GDP for the second quarter of 2021, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +6.56% annual rate, up 0.06 percentage points (pp) from their previous estimate and up 0.28pp from the prior quarter.Please share this article - Go to very top of page, right hand side, for social media buttons.None of the revisions in this report are material. The BEA continues to zero-sum reallocate consumer spending growth between various goods and services sectors, while inventories and government spending contracted even further. The increased overall growth came primarily from foreign trade,

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posted on 26 August 2021

Written by , Consumer Metrics Institute

BEA Revises Second Quarter 2021 GDP Growth Upward to 6.56%

In their second estimate of the US GDP for the second quarter of 2021, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +6.56% annual rate, up 0.06 percentage points (pp) from their previous estimate and up 0.28pp from the prior quarter.

Understated Inflation Produces 'Unreal' GDP Growth Double Real Growth


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None of the revisions in this report are material. The BEA continues to zero-sum reallocate consumer spending growth between various goods and services sectors, while inventories and government spending contracted even further. The increased overall growth came primarily from foreign trade, with both exports and imports boosting the headline number.

In an earlier release, annualized household disposable income was revised $297 lower than in the previous report, and the household savings rate was reported to be 10.3%, down -0.6pp from the previous report.

For this estimate the BEA assumed an effective annualized deflator of 6.22%. During the same quarter the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was higher at 9.68%. Under estimating inflation results in optimistic growth rates, and if the BEA's nominal data was deflated using CPI-U inflation information the headline growth number would have been nearly halved to 3.51%.

Among the notable items in the report :

  • Consumer spending for goods was reported to be growing at a 2.95% rate, up 0.27pp from the previous estimate and down -2.74pp from the prior quarter.
  • The contribution to the headline from consumer spending on services was reported to be 4.85%, down -0.25pp from the previous report and up 3.10pp from the prior quarter. The combined consumer contribution to the headline number was 7.80%, up 0.02pp from the previous report.
  • The headline contribution for commercial/private fixed investments was revised to 0.63%, up 0.06pp from the previous report and down -1.62pp from the prior quarter.
  • Inventories subtracted -1.30% from the headline number, down -0.17pp from the previous report and up 1.32pp from the prior quarter. It is important to remember that the BEA's inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity pricing or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.
  • The contribution to the headline from governmental spending was revised to -0.33%, down -0.06pp from the previous report and down -1.10pp from the prior quarter.
  • The contribution from exports was revised to 0.70%, up 0.06pp from the previous report and up 1.00pp from the prior quarter.
  • Imports subtracted -0.94% annualized 'growth' from the headline number, up 0.15pp from the previous report and up 0.32pp from the prior quarter. Foreign trade contributed a net -0.24pp to the headline number.
  • The annualized growth in the 'real final sales of domestic product' was revised to 7.86%, up 0.23pp from the previous report and down -1.04pp from the prior quarter. This is the BEA's 'bottom line' measurement of the economy (and it excludes the inventory data).
  • As mentioned above, real per-capita annualized disposable income was revised $-297 lower than in the previous estimate. The annualized household savings rate was 10.3% (down -0.6pp from the previous report). In the 52 quarters since 2Q-2008 the cumulative annualized growth rate for real per-capita disposable income has been 1.57%.

The Numbers, As Revised

As a quick reminder, the classic definition of the GDP can be summarized with the following equation:

Understated Inflation Produces 'Unreal' GDP Growth Double Real Growthor, as it is commonly expressed in algebraic shorthand:

Understated Inflation Produces 'Unreal' GDP Growth Double Real Growth

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:

Understated Inflation Produces 'Unreal' GDP Growth Double Real Growth

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:

Understated Inflation Produces 'Unreal' GDP Growth Double Real Growth

Summary and Commentary

The key points of this report can be summarized as follows:

  • Half of the reported growth was generated by under reported inflation.
  • Households continued to experience reduced disposable income, even prior to the currently spiking inflation rates.

The +6% growth rates in this report are less real than the BEA would like us to believe.


Caption graphic photo credit: Image by Vicki Nunn from Pixabay.


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