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  September 30, 2020 - BEA Revises Second Quarter 2020 GDP Contraction Slightly Upward to -31.39%:

In their third and final estimate of the US GDP for the second quarter of 2020, the Bureau of Economic Analysis (BEA) reported that the US economy was contracting at a -31.39% annual rate, up 0.32 percentage points (pp) from their previous estimate -- but still down -26.42pp from the prior quarter.

This revision consists of line item adjustments that, in the grand scheme of things, are largely immaterial and merely statistical noise. The line item re-allocations consist primarily of a slight lessening of the contraction rate for spending on consumer services (now an annualized -29.95%), that are mostly offset by further weakening in nearly all other spending categories.

In an earlier release, annualized household disposable income was revised $-36 lower than in the previous report, and the household savings rate was still reported to be an astonishing 25.7%, down -0.3pp from the previous report. Think about that: during the second quarter of 2020 households were not spending over 25% of what remained of their disposable income.

For this estimate the BEA assumed an effective annualized deflator of -2.08%. During the same quarter the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was less negative at -1.14%. 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 -31.68%.

Among the notable items in the report :

-- Consumer spending for goods was reported to be contracting at a -2.06% rate, down -0.06pp from the previous estimate and down -2.09pp from the prior quarter.

-- The contribution to the headline from consumer spending on services was reported to be -21.95%, up 0.82pp from the previous report and down -17.17pp from the prior quarter. The combined consumer contribution to the headline number was -24.01%, up 0.76pp from the previous report.

-- The headline contribution for commercial/private fixed investments was revised to -5.27%, down -0.07pp from the previous report and down -5.04pp from the prior quarter.

-- Inventories subtracted -3.50% from the headline number, down -0.04pp from the previous report and down -2.16pp 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 revised to 0.77%, down -0.05pp from the previous report and up 0.55pp from the prior quarter.

-- The contribution from exports was revised to -9.51%, down -0.29pp from the previous report and down -8.39pp from the prior quarter.

-- Imports added 10.13% annualized 'growth' to the headline number, up 0.01pp from the previous report and up 7.88pp from the prior quarter. Foreign trade contributed a net 0.62pp to the headline number.

-- The annualized growth in the 'real final sales of domestic product' was revised to -27.89%, up 0.36pp from the previous report and down -24.26pp 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 revised $-36 lower than in the previous estimate. The annualized household savings rate was 25.7% (down -0.3pp from the previous report). In the 48 quarters since 2Q-2008 the cumulative annualized growth rate for real per-capita disposable income has been 2.20%.



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) $19.5 = $13.1 + $3.1 + $3.8 + $-.5
% of GDP 100.00% = 67.10% + 16.03% + 19.67% + -2.79%
Contribution to GDP Growth % -31.39% = -24.01% + -8.77% + 0.77% + 0.62%


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

Q2-2020 Q1-2020 Q4-2019 Q3-2019 Q2-2019 Q1-2019 Q4-2018 Q3-2018 Q2-2018 Q1-2018 Q4-2017 Q3-2017
Total GDP Growth -31.39% -4.97% 2.37% 2.57% 1.50% 2.94% 1.31% 2.12% 2.70% 3.78% 3.88% 2.95%
Consumer Goods -2.06% 0.03% 0.12% 0.87% 1.57% 0.52% 0.53% 0.60% 0.88% 0.45% 1.61% 0.86%
Consumer Services -21.95% -4.78% 0.96% 0.96% 0.90% 0.73% 0.52% 1.19% 1.25% 0.95% 1.20% 0.71%
Fixed Investment -5.27% -0.23% 0.17% 0.42% -0.07% 0.50% 0.46% 0.14% 0.76% 1.42% 1.57% 0.21%
Inventories -3.50% -1.34% -0.82% -0.09% -0.97% 0.21% 0.23% 1.58% -0.94% 0.41% -0.50% 1.05%
Government 0.77% 0.22% 0.42% 0.37% 0.86% 0.43% -0.16% 0.44% 0.50% 0.26% 0.49% 0.04%
Exports -9.51% -1.12% 0.39% 0.10% -0.54% 0.22% 0.34% -0.66% 0.24% 0.34% 1.36% 0.33%
Imports 10.13% 2.25% 1.13% -0.06% -0.25% 0.33% -0.61% -1.17% 0.01% -0.05% -1.85% -0.25%
Real Final Sales -27.89% -3.63% 3.19% 2.66% 2.47% 2.73% 1.08% 0.54% 3.64% 3.37% 4.38% 1.90%




Summary and Commentary

There is nothing new in this report, which is merely the statistical fine tuning and re-hashing of a quarter that ended nearly three months ago. Unfortunately, the BEA's monthly release cycle gives us three progressively refined views of the same past quarter, when what we really need to know is how the economy has been performing since then.

This also sets up a critical first report for the third quarter of 2020, to be released on October 29th -- six days before the 2020 US Presidential election. Although the actual numbers are likely to be something of a wild card (the current NY Fed and Atlanta Fed "real-time" headline guesstimates differ by over 15%!), the "annualization-of-quarterly-changes" methodology employed by the BEA is guaranteed to generate an eye-popping positive headline number (probably somewhere from 15% to over 30% of spectacular "growth"). Clearly a number of politicians are going to claim that the BEA has just verified a "V" shaped recovery, for which they will take credit -- although by then most votes will already have been cast.

But sadly the BEA's numbers will only be telling us that the first phase of the down leg of the highly desired (albeit unlikely) "V" has moderated, not that the hypothetical up leg of a "V" shaped recovery has actually commenced. We will, in fact, still know very little about how long this recession is going to last.
 
     

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