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.
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:
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:
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.
Dr. Rick Davis is president of Consumer Metrics Institute and publishes proprietary consumer metrics data.© 2013 The Consumer Metrics Institute, Inc.