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  November 28, 2018 - BEA Leaves 3rd Quarter 2018 GDP Unchanged at 3.50%:

In their second estimate of the US GDP for the third quarter of 2018, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +3.50% annual rate, up +0.01% from their previous estimate but still down -0.66% from the prior quarter.

The +0.01% improvement in the headline number masks a troublesome shift in the composition of that growth from consumer spending to even more inventory growth. The headline contribution from consumer spending on goods and services weakened by -0.24% and the growth is now lower than the prior quarter. Offsetting that was an upward revision to inventories (+0.20%), which are now reported to be growing at a +2.27% annualized rate. As a consequence, the BEA's "bottom line" measurement of the economy (the "real final sales of domestic product") was revised downward by -0.19%, now dropping by over four percent (-4.10%) from the prior quarter.

The growth in commercial fixed investment was revised upward +0.29%, while government spending and foreign trade was revised a combined -0.24% downward. Foreign trade is now removing -1.91% from the headline number, off -1.79% from the prior quarter.

Again it is worth noting that the headline number has been propped up by the most fickle of the BEA's data items: inventories; which added +3.44% more to the headline than they did during the prior quarter.

Household disposable income was revised downward by -$86 per annum, and the household savings rate was revised downward to 6.3%, and is now down -0.2% from the prior quarter.

For this revision the BEA assumed an effective annualized deflator of 1.41%. During the same quarter (July 2018 through September 2018) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was somewhat higher at 1.83%. 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 lower at a +3.14% annualized growth rate.

Among the notable items in the report :

-- The headline contribution from consumer expenditures for goods was revised downward -0.20% to +1.00%, down -0.16% from the prior quarter.

-- The contribution to the headline from consumer spending on services was revised downward -0.04% to +1.44%, up +0.03% from last quarter. The combined consumer contribution to the headline number was revised downward -0.24% to +2.45%, down -0.13% from the prior quarter.

-- Commercial private fixed investments was revised upward +0.29%, contributing +0.25 to the headline number. This remains down -0.85% from the prior quarter.

-- Inventories boosted the headline number by +2.27%, up +0.20% from the previous estimate and up +3.44% from the prior quarter. 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.

-- The growth in governmental spending was revised downward by -0.12%, and is now contributing +0.44% to the headline number (and up only +0.01% from the prior quarter).

-- The exports crash worsened, and it is now subtracting -0.55% from the headline number, down -0.10% from the previous report and -1.67% from the prior quarter.

-- Imports were largely unchanged in this report, subtracting -1.36% from the headline number (down -0.02% from the previous report and down -1.46% from the prior quarter). In aggregate, foreign trade negatively impacted the headline number by nearly two percent (-1.91%).

-- The "real final sales of domestic product" growth was revised downward by -0.19% to +1.23%, and it is down over four percent (-4.10%) 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 income was revised downward -$86, but is still up $169 per annum from a revised prior quarter. The household savings rate was reported to be 6.3% (down -0.4% from the revised prior quarter).



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) $20.7 = $14.1 + $3.7 + $3.6 + $-0.7
% of GDP 100.00% = 68.01% + 17.95% + 17.19% + -3.15%
Contribution to GDP Growth % 3.50% = 2.45% + 2.52% + 0.44% + -1.91%


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-2018 2Q-2018 1Q-2018 4Q-2017 3Q-2017 2Q-2017 1Q-2017 4Q-2016 3Q-2016 2Q-2016 1Q-2016 4Q-2015 3Q-2015 2Q-2015 1Q-2015
Total GDP Growth 3.49% 4.16% 2.22% 2.29% 2.82% 3.00% 1.79% 1.77% 1.92% 2.28% 1.54% 0.41% 0.97% 3.35% 3.32%
Consumer Goods 1.20% 1.16% -0.13% 1.42% 0.86% 1.17% 0.40% 0.58% 0.70% 1.01% 0.72% 0.51% 0.91% 1.02% 0.94%
Consumer Services 1.49% 1.42% 0.49% 1.22% 0.65% 0.79% 0.82% 1.17% 1.09% 1.29% 0.90% 1.02% 1.00% 1.29% 1.41%
Fixed Investment -0.04% 1.10% 1.34% 1.04% 0.44% 0.72% 1.60% 0.28% 0.52% 0.46% 0.31% -0.33% 0.51% 0.63% -0.01%
Inventories 2.07% -1.17% 0.27% -0.91% 1.04% 0.23% -0.80% 1.03% -0.59% -0.62% -0.62% -0.70% -0.73% -0.25% 2.16%
Government 0.56% 0.43% 0.27% 0.41% -0.18% 0.01% -0.13% 0.03% 0.17% -0.15% 0.60% 0.12% 0.33% 0.70% 0.40%
Exports -0.45% 1.12% 0.43% 0.79% 0.42% 0.44% 0.59% -0.44% 0.71% 0.39% -0.31% -0.28% -0.44% 0.48% -0.56%
Imports -1.34% 0.10% -0.45% -1.68% -0.41% -0.36% -0.69% -0.88% -0.68% -0.10% -0.06% 0.07% -0.61% -0.49% -1.02%
Real Final Sales 1.42% 5.33% 1.95% 3.20% 1.78% 2.77% 2.59 0.74% 2.51% 2.90% 2.16% 1.11% 1.70% 3.60% 1.16%




Summary and Commentary

The key number from this report is the BEA's own "bottom line" for the report, the "real final sales of domestic product," which is now reported to be down more than 4% from the prior quarter. This revision simply reinforced the prior report's story -- that the growth rate for consumer spending was weakening, with inventories growing as a consequence. Global economics and politics also are not helping, with trade now removing another 3% from the headline quarter over quarter.

And it is difficult to get a handle on household incomes and savings, which have been recently revised to the point that it is hard to trust the numbers any more.

In a sense this report was even more of the same, an economy clearly in transition from the happy news reported for 2Q-2018.
 
     

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