In their second 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 2.67% annualized rate, an upward revision of +0.65% from the previously published first estimate for the quarter.
The improved headline number came exclusively from two sources: substantial upward revisions to inventories and exports. All other components of the growth rate actually weakened — particularly those associated with consumers. The happy changes to the headline masked the fact that the BEA’s bottom line “real final sales of domestic product” fell by nearly a quarter of a percent to 1.90%. Excluding the impact of a huge surge in Federal governmental spending, rising inventories and increasing exports the headline number would have been a mere 1.03%.
The impact of the rise in Federal spending was nontrivial: nominal spending on salaries, materiel and construction grew at an annualized 10.5% rate during the quarter, with nominal defense spending alone growing at an astounding annualized 13.9% rate. This surge in public spending could have been either an organic attempt by the defense establishment to stockpile materiel prior to the “fiscal cliff” or a more politically motivated “stealth stimulus” by the Administration. In either case the stimulus was accomplished without much in the way of public debate or fiscal transparency.
For this set of revisions the BEA assumed annualized net aggregate inflation of 2.80%. 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 an anemic 0.57%.
And real per capita disposable income was revised sharply downward for the quarter (it is now reported to be contracting at a -0.31% annualized rate). During the past 6 quarters (18 months) real per capita disposable income has shrunk by $78 per year — with $25 of that loss occurring during the past quarter. At that rate there will be no consumer-led recovery in the foreseeable future.
Indeed, from the perspective of consumers, taxpayers and households living on “Main Street,” the headline number should appear as either puzzling or pure fiction.
Among the notable items in the report:
– The contribution of consumer expenditures for goods to the headline number was revised downward to 0.83% (from 1.03% in the previous report).
– The contribution made by consumer services was more than halved to 0.16% — off sharply from the 0.39% in the previous report.
– The growth rate contribution from private fixed investments was also halved to 0.10% (down from 0.20% in the prior report).
– The report for inventories was completely inverted from the first estimate, and the dramatic revision from reported inventory draw downs (-0.12%) to reported inventory building (+0.77%) added nearly a full percent to the headline number. Clearly the BEA’s first estimates on inventories are problematic.
– As mentioned above, the story of the third quarter’s economy came from sharply increasing governmental expenditures. Growth in government spending is now reported to have added +0.67% to the headline number after subtracting -0.60% as recently as the first quarter of 2012. All of that growth came from Federal spending, while the state and local contribution to the headline remained negative (-0.04%).
– Exports also reversed their impact on the headline number, now adding 0.16% after previously subtracting -0.23% in the BEA’s prior estimate for the third quarter. This revision is also counter intuitive, since it seems to imply an improving global economy despite any number of reports to the contrary.
– And imports are now reported to be subtracting -0.02% from the headline growth rate (a minor revision to the +0.04% previously reported).
– The annualized growth rate of “real final sales of domestic product” was revised downward to 1.90%, some 0.24% below the prior report and about a half percent below the 2.36% reported for the first quarter of 2012.
– Real per-capita disposable income was down $25 during the quarter (to $32,686 per year). This is down $78 from the $32,764 reported for the 1st quarter of 2011, now some 6 quarters ago. The reported annualized contraction rate of -0.31% 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 -3.70%.
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
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
This report’s headline number substantially misrepresents the state of the domestic economy, particularly the consumer portion of that economy. Removing the impact of the Federal spending surge, growing inventories and exports removes nearly two-thirds of the apparent growth. If that remaining growth is then deflated using BLS inflation data, the consumer portion of the economy is actually shrinking at an annualized rate in excess of -1.0%.
Recapping the issues that merit caution moving forward:
– About 27% of the headline growth rate came from a $31 billion surge in Federal spending, probably from advance contracting in anticipation of the “fiscal cliff” (and/or a conscious effort to provide a purely executive “stealth stimulus” to the economy).
– Inventories are once again reported to be growing, with 29% of the headline growth rate coming from such growth. Over time inventory growth is a nearly zero-sum game, and that apparent growth will need to be paid back in coming quarters.
– The accelerating 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 shrank by $24.4 billion during the quarter) and increased student loans.
We would like to think that the economy is indeed growing at nearly 3% — which by all rights it should be nearly four years into a purported “recovery.” Unfortunately, the underlying reality (especially for US consumers and wage earners) seems to point in a different direction.
Dr. Rick Davis is president of Consumer Metrics Institute and publishes proprietary consumer metrics data.