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  March 28, 2018 - BEA Revises 4th Quarter 2017 GDP Growth Upward to 2.88%:

In their third (and final) estimate of the US GDP for the fourth quarter of 2017, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +2.88% annual rate, up +0.35% from their previous estimate, but still down -0.28% from the prior quarter.

The boost in the headline number resulted from upward revisions to contributions from consumer spending (+0.17%) and inventories (also a +0.17% increase, as a result of reportedly slower inventory contractions). No other line items changed materially. The BEA's "bottom line" for the quarter (their "Real Final Sales of Domestic Product", which excludes inventories) increased to +3.41%, up +0.18% from the previous estimate and +1.04% from the prior quarter.

Real annualized household disposable income decreased -$2 per year from the previous report to $39,223 (in 2009 dollars). The household savings rate deteriorated to 2.6%, lower than the level recorded in third quarter of 2007 -- at the onset of the "Great Recession."

For this revision the BEA assumed an effective annualized deflator of 2.35%. During the same quarter (October 2017 through December 2017) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was a very similar but slightly higher 2.49%. 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 slightly lower at a +2.82% annualized growth rate.

Among the notable items in the report :

-- The headline contribution from consumer expenditures for goods increased to +1.67%, up +0.06% from the +1.61% previously reported (and up +0.70% from the prior quarter).

-- The contribution to the headline from consumer spending increased +0.11% to +1.08%. The combined consumer contribution to the headline number climbed to +2.75%, up +1.26% from 3Q-2017.

-- The headline contribution from commercial private fixed investments was revised upward slightly (+0.02%) to +1.31%, up +0.91% from the prior quarter.

-- Inventories subtracted -0.53% from the headline number -- after removing -0.70% in the previous report and adding +0.79% in the prior quarter (a quarter-to-quarter swing of -1.32%). It is important to remember that the BEA's inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity price or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.

-- Governmental spending added +0.51% to the headline number, up +0.02% from the previous report.

-- Exports contributed +0.83% to the headline number, up +0.58% from the prior quarter.

-- Imports subtracted -1.99% from the headline number, down -0.02% from the previous report and a drop of over two percent (-2.10%) from the prior quarter. In aggregate, foreign trade subtracted -1.16% from the headline number.

-- The "real final sales of domestic product" growth was revised upward to an annualized 3.41%, up +1.04% 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 annual disposable was revised downward -$2 per annum from the previous report and it is now up only +$30 per annum from the 3rd quarter number. The household savings rate was reported to be 2.6% (down -0.8% from the prior quarter and down more than a full percent from 2Q-2017). As always, it is important to keep this line item in perspective: real per-capita annual disposable income is up only +6.94% in aggregate since the second quarter of 2008 -- a meager annualized +0.71% growth rate over the past 38 quarters.



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) $19.8 = $13.7 + $3.3 + $3.4 + $-0.6
% of GDP 100.00% = 69.12% + 16.68% + 17.25% + -3.05%
Contribution to GDP Growth % 2.88% = 2.75% + 0.78% + 0.51% + -1.16%


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-2017 3Q-2017 2Q-2017 1Q-2017 4Q-2016 3Q-2016 2Q-2016 1Q-2016 4Q-2015 3Q-2015 2Q-2015 1Q-2015 4Q-2014 3Q-2014 2Q-2014 1Q-2014
Total GDP Growth 2.88% 3.16% 3.06% 1.24% 1.76% 2.79% 2.25% 0.57% 0.48% 1.63% 2.74% 3.24% 2.01% 5.20% 4.61% -0.92%
Consumer Goods 1.67% 0.97% 1.16% 0.15% 1.03% 0.69% 1.30% 0.46% 0.63% 0.95% 0.99% 0.93% 1.26% 1.01% 1.38% 0.52%
Consumer Services 1.08% 0.52% 1.08% 1.17% 0.97% 1.23% 1.28% 0.77% 1.17% 0.90% 1.04% 1.56% 2.10% 1.64% 0.96% 0.74%
Fixed Investment 1.31% 0.40% 0.53% 1.27% 0.28% 0.25% 0.22% -0.05% -0.41% 0.55% 0.77% 0.67% 0.04% 1.45% 1.56% 0.76%
Inventories -0.53% 0.79% 0.12% -1.46% 1.06% 0.16% -0.67% -0.64% -0.68% -0.22% -0.63% 1.45% -0.26% 0.44% 0.91% -1.69%
Government 0.51% 0.12% -0.03% -0.11% 0.03% 0.09% -0.16% 0.32% 0.05% 0.21% 0.60% 0.27% -0.11% 0.39% 0.20% -0.11%
Exports 0.83% 0.25% 0.42% 0.85% -0.47% 0.74% 0.32% -0.33% -0.29% -0.51% 0.47% -0.59% 0.65% 0.09% 1.22% -0.35%
Imports -1.99% 0.11% -0.22% -0.63% -1.14% -0.37% -0.04% 0.04% 0.01% -0.25% -0.50% -1.05% -1.67% 0.18% -1.62% -0.79%
Real Final Sales 3.41% 2.37% 3.94% 2.70% 0.70% 2.63% 2.92% 1.21% 1.16% 1.85% 3.37% 1.79% 2.27% 4.76% 3.70% 0.77%




Summary and Commentary

The boost in the headline number came equally from consumer spending and inventory revisions. The only other material change was the deteriorating household savings rate. The major takeaway from this report is the latter :

-- Despite the current happy unemployment numbers, household disposable income and savings rates remain weak. The savings rate is lower than the level seen at the brink of the "Great Recession" and disposable income has grown less than 7% in aggregate over the past 10 years.

As we mentioned last month, the stagnant household income numbers should (in theory) get a boost in the first and second quarters of 2018 from the "Tax Cuts and Jobs Act of 2017." The withholding changes should have been rolled out during the first quarter and will be in effect for the entire second quarter.

We will be watching closely to see when the improved take-home pay translates into higher consumer spending. It is likely that the spending boost will lag by a quarter or more while household budgets (and savings rates) regain some breathing room.
 
     

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