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  April 29, 2020 - BEA Reports that First Quarter 2020 GDP Contracted at a -4.79% Rate:

In their first (preliminary) estimate of the US GDP for the first quarter of 2020, the Bureau of Economic Analysis (BEA) reported that the US economy was contracting at a -4.79% annual rate, down -6.91 percentage points (pp) from the prior quarter.

This report begins to reflect the impact of the Covid-19 pandemic. The details are nearly all negative, with (as expected) consumer spending on services taking the biggest hit. And particularly telling is the reported increase in the household savings rate, which increased a full 2pp to 9.6%, the highest level since the fourth quarter of 2012. Even consumer monies were staying at home.

Annualized household disposable income was reported to be $11 higher than in the prior quarter, and the household savings rate was reported to be 9.6%, up 2.0pp from the prior quarter.

For this estimate the BEA assumed an effective annualized deflator of 1.38%. During the same quarter the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was lower at -0.76%. Over estimating inflation results in pessimistic growth rates, and if the BEA's nominal data was deflated using CPI-U inflation information the headline growth number would have been -2.72%.

Among the notable items in the report :

-- Consumer spending for goods was reported to be contracting at a -0.27% rate, down -0.39pp from the prior quarter.

-- The contribution to the headline from consumer spending on services was reported to be -4.99%, down -6.11pp from the prior quarter. The combined consumer contribution to the headline number was -5.26%, down -6.50pp from the prior quarter.

-- The headline contribution for commercial/private fixed investments was reported to be -0.43%, down -0.34pp from the prior quarter.

-- Inventories subtracted -0.53% from the headline number, up 0.45pp 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 pricing or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.

-- The contribution to the headline from governmental spending was reported to be 0.13%, down -0.31pp from the prior quarter.

-- The contribution from exports was reported to be -1.02%, down -1.26pp from the prior quarter.

-- Imports added 2.32% annualized 'growth' to the headline number, up 1.05pp from the prior quarter. Foreign trade contributed a net 1.30pp to the headline number.

-- The annualized growth in the 'real final sales of domestic product' was reported to be -4.26%, down -7.36pp 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 annualized disposable income was reported to have increased by $11 quarter to quarter. The annualized household savings rate was 9.6% (up 2.0pp from the prior quarter). In the 47 quarters since 2Q-2008 the cumulative annualized growth rate for real per-capita disposable income has been 1.45%.



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) $21.5 = $14.6 + $3.7 + $3.9 + $-.5
% of GDP 100.00% = 67.58% + 16.99% + 17.88% + -2.45%
Contribution to GDP Growth % -4.79% = -5.26% + -0.96% + 0.13% + 1.30%


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

Q1-2020 Q4-2019 Q3-2019 Q2-2019 Q1-2019 Q4-2018 Q3-2018 Q2-2018 Q1-2018 Q4-2017 Q3-2017 Q2-2017
Total GDP Growth -4.79% 2.12% 2.09% 2.01% 3.09% 1.09% 2.92% 3.50% 2.55% 3.55% 3.20% 2.15%
Consumer Goods -0.27% 0.12% 1.09% 1.74% 0.32% 0.33% 0.75% 1.13% 0.27% 1.55% 0.85% 1.14%
Consumer Services -4.99% 1.12% 1.02% 1.29% 0.46% 0.65% 1.59% 1.57% 0.88% 1.57% 0.76% 0.49%
Fixed Investment -0.43% -0.09% -0.14% -0.25% 0.56% 0.46% 0.13% 0.89% 0.94% 1.45% 0.25% 0.48%
Inventories -0.53% -0.98% -0.03% -0.91% 0.53% 0.07% 2.14% -1.20% 0.13% -0.64% 1.00% 0.11%
Government 0.13% 0.44% 0.30% 0.82% 0.50% -0.07% 0.36% 0.44% 0.33% 0.42% -0.02% 0.24%
Exports -1.02% 0.24% 0.11% -0.69% 0.49% 0.18% -0.78% 0.71% 0.10% 1.19% 0.54% 0.20%
Imports 2.32% 1.27% -0.26% 0.01% 0.23% -0.53% -1.27% -0.04% -0.10% -1.99% -0.18% -0.51%
Real Final Sales -4.26% 3.10% 2.12% 2.92% 2.56% 1.02% 0.78% 4.70% 2.42% 4.19% 2.20% 2.04%




Summary and Commentary

The key points of this report can be summarized as follows:

-- This is only the beginning, and this number is very likely to be revised lower in the next two reports and again in July. We have previously criticized the BEA for being late in recognizing dramatic turns in the economy, and we would be remiss if we didn't recognize that they are much more timely this time around.

-- Timing is everything. Depending on just how bad the second quarter is, the third quarter is likely to show quarter-over-quarter growth -- even as year-over-year data remains abysmal. That quarter-over-quarter growth will be conveniently announced just prior to the November Presidential Election. The political cynics among us might suggest that the BEA's new-found timeliness in fully reporting this contraction stems from an interest in advancing the inevitable bad news precisely in order to set the stage for a 3Q-2020 quarter-over-quarter turnaround.

-- Moving forward, the contraction in consumer services spending, the security of paychecks and the rise in the household savings rate will not be evenly experienced among all demographics -- just like the pandemic itself. Individual household economics will continue to divide those advocating for maximized public health and those seeking a rapid return to economic normality.

The latter point may be the most important. We may be observing yet another divide opening in an already divided society.
 
     

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