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  March 27, 2014 - BEA Revises 4th Quarter 2013 GDP Growth Up Slightly To A 2.64% Annual Rate:

In their third estimate of the US GDP for the fourth quarter of 2013, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a 2.64% annualized rate, up .27% from the 2.37% growth rate previously reported -- but still down sharply (-1.53%) from the 4.19% reported for the 3rd quarter. The improvement in the headline growth came almost entirely from the BEA's reassessment of consumer spending on services (adding .57% to the headline number, mostly from increased spending on health care). Offsetting that increase were downward adjustments to consumer spending on goods (-.06%), the growth rate for inventories (which lost -.16% and is now reported to be in slight contraction) and fixed investment (-.15%). Only minor adjustments were made to exports and imports. As a consequence of the consumer services revision and the slight inventory contraction the BEA's "bottom line" growth rate for the economy (the "real final sales of domestic product") strengthened by nearly a half percent to a 2.66% annualized growth rate.

Real annualized per-capita disposable income is now reported to have been essentially flat during the fourth quarter (gaining $1 annualized per-capita), and the household savings rate was adjusted back downward to 4.3% (down -.6% from the 4.9% in the prior quarter and down -2.3% year-over-year from the fourth quarter of 2012). That savings rate has been effectively absorbing the January 2013 2% increase in FICA tax rates -- allowing households to sustain spending even as take-home pay took a haircut.

Finally, for this report the BEA assumed annualized net aggregate inflation of 1.56%. During the fourth quarter (i.e., from October through December) the growth rate of the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was slightly lower at a 1.46% (annualized) rate, while the price index reported by the Billion Prices Project (BPP -- which arguably best reflects the experiences of the American consumer) was substantially higher at 2.46%. Under reported inflation will result in overly optimistic growth data, and if the BEA's numbers were corrected for inflation using the BPP inflation rate the fourth quarter's growth rate would have only been 1.78%.

Among the notable items in the report :

-- The contribution of consumer expenditures for goods to the headline number decreased slightly to 0.66% (down -0.06%, and -0.37% lower than the 1.03% contribution in the prior quarter).

-- The contribution made by consumer services spending increased to 1.57% (up from the 1.00% previously reported). Almost all of this increased spending was in health care.

-- The growth rate contribution from private fixed investments decreased to 0.43% (less than half of the 0.89% reported during the prior quarter).

-- Notably inventories are now reported to be contracting at a marginal pace -- subtracting -0.02% from the headline growth rate (down -1.65% from the prior quarter). The prior three quarters had seen substantial inventory growth that had boosted the reported annualized growth rate by an average of 1%.

-- The Federal government "shutdown" is still in the "current" reporting quarter (i.e., 4Q-2013), and it removed -0.99% from the headline number.

-- Exports contributed 1.23% to the overall growth rate, essentially unchanged (up 0.01%) from the previous report. In context, this is the strongest export growth since the fourth quarter of 2010.

-- Imports subtracted -0.24% from the headline number (unchanged from the previous report).

-- The annualized growth rate for the "real final sales of domestic product" increased to 2.66% (up from the 2.45% in the prior quarter). This is the BEA's "bottom line" measurement of the economy -- and it is now slightly stronger than the headline number because of the minor contraction in inventories.

-- And as mentioned above, real per-capita annual disposable income is now reported to have grown by a minuscule amount during the quarter -- increasing a miserable $1 per year. But that number is down a material -$316 per year (roughly 1%) from the fourth quarter of 2012 (before the FICA rates normalized) and it is up less than 1% in total ($270 per year) since the second quarter of 2008 -- some 22 quarters ago.



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

Total GDP = C + I + G + (X-M)
Annual $ (trillions) $17.1 = $11.7 + $2.8 + $3.1 + $-0.5
% of GDP 100.0% = 68.2% + 16.2% + 18.3% + -2.7%
Contribution to GDP Growth % 2.64% = 2.23% + 0.41% + -0.99% + 0.99%


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

4Q-2013 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 2.64% 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 0.66% 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 1.57% 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 0.43% 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 -0.02% 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 -0.99% 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 1.23% 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 -0.24% -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 2.66% 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 and Commentary

There are a few of notable take-aways from this report, especially when looking ahead to the first quarter of 2014 :

-- The year-long cycle of inventory building has apparently come to an end. Dating back to the first quarter of 2006, the reported average real annualized growth rate of inventories has been a relatively neutral +0.04%. This is not surprising because over an extended time period inventories are mostly a cyclical zero-sum game, with excessive growth or contraction in any one period being corrected during subsequent periods. Moving forward we should expect that inventories will continue their cyclical transition from building to contraction, with negative consequences to the headline number.

-- The Federal government's "shutdown" subtracted roughly 1% from the fourth quarter's reported growth rate. If Federal spending simply reverts to the prior quarter's level, we might expect a roughly 1% boost to the headline number. On the other hand, if the Federal budget experienced a "catch-up" effect from sequestered spending that was merely pushed into the first quarter, we could see yet another quarter's report distorted by the "shutdown" -- this time with the first quarter shoved firmly to the upside.

-- The headline growth contribution from commercial fixed investment dropped over 2% from quarter to quarter, and it was sustained largely by spending on equipment (healthcare and transportation) -- with spending on structures actually contracting slightly. Residential housing construction flipped to significant contraction after 12 consecutive quarters of growth.

-- Although the growth contribution from imports is at about the long term average, exports are currently growing at about twice their longer term average. Sustained long term growth in exports requires healthy and growing trading partners. Given softening growth in a number of our trading partners, this historically high growth rate for exports may not be sustainable.

-- Household income shows no signs of recovery. Real per-capita income remains stagnant quarter to quarter, and down substantially year over year. It bears repeating that total real per-capita income growth since the second quarter of 2008 has been 0.73% -- an average annualized growth rate of just 0.13% during the entire "recovery." The household savings rate is down over 2.3% year over year, and it remains well below the historical long term savings rate.

-- Ominously, the just reported upside revision to "growth" in consumer spending was caused by an increased real cost of household healthcare. And in the fourth quarter of 2013 the ObamaCare launch was just sputtering, at best. We should expect consumer spending on services to continue to grow in the first quarter of 2014, largely as a result of non-discretionary healthcare expenses. But given stagnant household income, all of that heavily promoted spending for new coverage through health care exchanges has got to come from somewhere -- with both household discretionary spending and savings taking it on the chin as net spending further transfers to the healthcare industries.

The next GDP report (the first estimate for the first quarter of 2014) will certainly be interesting. It might well be distorted by the bounce-back in Federal spending, and it could reflect ongoing softening of commercial spending for inventories and fixed investments. It will also begin to display the impact of the new healthcare initiatives on household spending and the overall structure of the economy.
 
     

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