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mining tracking data for an understanding of what American consumers were doing yesterday."

     
  December 20, 2013 - BEA Revises 3rd Quarter 2013 GDP Growth Upward Again to 4.12% Annual Rate:

In their third and final estimate of the US GDP for the third quarter of 2013, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a 4.12% annualized rate, up another 0.52% from the 3.60% growth rate previously reported for the third quarter and now up a full 1.64% from the second quarter. The improvement in the headline growth number came principally from consumption of consumer services and goods (adding a new additional 0.40% to the headline), and fixed investment (which improved its contribution by 0.08%). And the BEA's own "bottom line" growth rate for the economy (the "real final sales of domestic product") strengthened to a 2.45% annualized growth rate.

Real annualized per capita disposable income is now reported to have risen by $200 per year during the third quarter and the personal savings rate decreased slightly to 4.9% (from 5.0% reported earlier). That savings rate had taken a 2.5% hit (a 38% reduction in the savings rate) during the first quarter as households struggled to absorb the 2% increase in FICA tax rates. The savings rate has now recovered more than a third of those first quarter cutbacks -- with the funding of those savings coming mostly through weaker growth in household expenditures.

Finally, for this report the BEA assumed annualized net aggregate inflation of 1.98%. This deflator is reasonably close to those recorded by its sister agencies within the US Government. During the third quarter (i.e., from June to September) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) rose by 1.73% (annualized), and the price index published by the Billion Prices Project (BPP) rose at an annualized rate of 1.72%. As a reminder : an overstatement of assumed inflation decreases the reported headline number -- and in this case the BEA's "deflator" slightly lowered 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 somewhat higher +4.46%, while using the BPP index (which arguably best reflects the experiences of the American consumer) would have generated an even higher +4.47% annualized rate.

Among the notable items in the report :

-- The contribution of consumer expenditures for goods to the headline number increased to 1.03% (up from 0.93% in the prior report).

-- The contribution made by consumer services improved to 0.32% (up from 0.02% previously reported, but still down from 0.53% in the prior quarter).

-- The growth rate contribution from private fixed investments strengthened to 0.89% (up from the 0.81% previously reported, but still down slightly from 0.96% in the prior quarter).

-- Inventories were shown as about the same as previously thought, contributing +1.67% to the headline growth rate (still more than four times the +0.41% contribution during the prior quarter).

-- A very slight contraction net governmental expenditures subtracted -0.01% from the headline number, with any reported growth occurring exclusively at state and local levels.

-- Exports contributed 0.52% to the overall growth rate, up slightly from the 0.50% previously reported -- but still down materially from the 1.04% reported for the second quarter.

-- And imports now subtracted -0.39% from the headline number (compared to -1.10% during the prior quarter).

-- The annualized growth rate for the "real final sales of domestic product" increased to 2.45% (up from the 2.07% in the previous quarter). This is the BEA's "bottom line" measurement of the economy -- which remains substantially weaker than the headline number because of the ongoing buildup of inventories.

-- And as mentioned above, real per-capita disposable income improved slightly and it is now reported to have increased by an annualized $200 from quarter to quarter. But that number is still down $317 per year relative to the fourth quarter of 2012 (before the FICA rates normalized).



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) $16.9 = $11.5 + $2.7 + $3.1 + $-0.5
% of GDP 100.0% = 68.2% + 16.2% + 18.6% + -3.0%
Contribution to GDP Growth % 4.12% = 1.35% + 2.56% + 0.08% + 0.13%


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 :

Quarterly Changes in % Contributions to GDP

3Q-2013 2Q-2013 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 4.12% 2.48% 1.14% 0.14% 2.78% 1.20% 3.71% 4.86% 1.37% 3.19% -1.29% 2.80% 2.78% 3.91% 1.59%
Consumer Goods 1.03% 0.71% 0.85% 0.85% 0.84% 0.50% 1.04% 1.14% 0.29% 0.05% 0.60% 1.66% 0.85% 1.14% 0.88%
Consumer Services 0.32% 0.53% 0.69% 0.29% 0.31% 0.78% 0.94% 0.51% 1.14% 0.98% 0.81% 1.21% 1.02% 1.07% 0.54%
Fixed Investment 0.89% 0.96% -0.23% 1.63% 0.39% 0.68% 1.21% 1.39% 1.96% 1.16% -0.05% 1.13% -0.04% 1.77% 0.11%
Inventories 1.67% 0.41% 0.93% -2.00% 0.60% -0.91% 0.36% 2.73% -1.60% 0.72% -1.06% -1.64% 1.90% 1.09% 1.66%
Government 0.08% -0.07% -0.82% -1.31% 0.67% 0.05% -0.28% -0.31% -0.52% -0.25% -1.61% -0.87% -0.07% 0.61% -0.63%
Exports 0.52% 1.04% -0.18% 0.15% 0.05% 0.51% 0.56% 0.38% 0.92% 0.64% 0.48% 1.47% 1.27% 1.10% 0.73%
Imports -0.39% -1.10% -0.10% 0.53% -0.08% -0.41% -0.12% -0.98% -0.82% -0.11% -0.46% -0.15% -2.15% -2.87% -1.70%
Real Final Sales 2.45% 2.07% 0.21% 2.14% 2.18% 2.11% 3.35% 2.13% 2.97% 2.47% -0.23% 4.44% 0.88% 2.82% -0.07%




Summary

For the past two months we have wondered how the BEA's latest growth estimates might impact the Federal Reserve's stance on monetary policy -- and particularly the duration and size of QE. At face value the new headline growth rate of 4.12% qualifies as "healthy economic growth," and places the US among the fastest growing developed countries. In fact, a growth rate above 4% would argue for far more than a modest $10 billion per month taper -- if not a return to more historically normal interest rates.

Then why such a modest monetary response?

The Federal Reserve clearly understands that the headline 4.12% is neither real nor sustainable :

-- The vast majority of the economy (consumer spending -- nearly 70% of GDP) was growing at a paltry 1.35%.

-- Over 40% of the headline number came from growing inventories. Conventional wisdom has this component reversing itself in future quarters -- reverting to a long term net zero gain or loss. In fact, since 2006 the average annualized real contribution from inventories has been essentially zero (-0.02%). Bloated inventories have a tendency to normalize, and in coming quarters we can expect production cuts to accomplish just that.

-- Employment numbers, while technically improving, are still weak by historic "full employment" standards. And it is increasingly obvious that the modest improvement in the unemployment numbers is an artifact of a major deformation of the work force -- with fewer people choosing to look for work and more being forced to accept multiple part time jobs.

-- Real per capita disposable income is still down -0.85% year-to-date. And if households continue to normalize their savings rates over the next few quarters (just as they have over the past two quarters while attempting to move back towards the savings level "comfort zone" seen prior to the January FICA increase), those increased savings will have to come from reduced spending.

-- The aggregate numbers continue to mask an ongoing shift in income distribution : although the average per capita income data has grown some 3.3% since October 2008 (per the BEA), the median household income has shrunk some 7% over that same time span (per Sentier Research ). Thus whatever growth the BEA is reporting is not likely to shared by the vast majority of the electorate.

Arguably, the "healthy economic growth" implied in the 4.12% headline growth rate might be considered a tad delusional. And apparently the Federal Reserve knows that only too well.
 
     

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