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  February 24, 2022 - BEA Revises Fourth Quarter 2021 GDP Growth Upward to 6.98%:

In their second estimate of the US GDP for the fourth quarter of 2021, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +6.98% annual rate, up 0.09 percentage points (pp) from their previous estimate and up 4.68pp from the prior quarter.

As mentioned last month, over 70% of the headline number (4.90pp) came from growing inventories, while arguably another 25% came from underestimated inflation.

In an earlier release, annualized household disposable income was again revised $59 lower than in the previous report, and the household savings rate was reported to be 7.6%, up 0.2pp from the previous report.

For this estimate the BEA assumed an effective annualized deflator of 7.16%. During the same quarter the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was higher at 8.91%. 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 5.73%.

Among the notable items in the report :

-- Consumer spending for goods was reported to be growing at a 0.36% rate, up 0.23pp from the previous estimate and up 2.57pp from the prior quarter.

-- The contribution to the headline from consumer spending on services was reported to be 1.76%, down 0.36pp from the previous report and down 1.81pp from the prior quarter. The combined consumer contribution to the headline number was 2.12%, down 0.13pp from the previous report.

-- The headline contribution for commercial/private fixed investments was revised to 0.48%, up 0.23pp from the previous report and up 0.64pp from the prior quarter.

-- Inventories added 4.90% to the headline number, unchanged from the previous report and up 2.70pp 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 -0.45%, up 0.06pp from the previous report and down 0.62pp from the prior quarter.

-- The contribution from exports was revised to 2.35%, down 0.08pp from the previous report and up 2.94pp from the prior quarter.

-- Imports subtracted -2.42% annualized 'growth' from the headline number, up 0.01pp from the previous report and down 1.74pp from the prior quarter. Foreign trade subtracted a net 0.07pp from the headline number.

-- The annualized growth in the 'real final sales of domestic product' was revised to 2.08%, up 0.09pp from the previous report and up 1.98pp 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 $59 lower than in the previous estimate. The annualized household savings rate was 7.6% (up 0.2pp from the previous report). In the 54 quarters since 2Q-2008 the cumulative annualized growth rate for real per-capita disposable income has been 1.35%.



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) $24.0 = $16.3 + $4.5 + $4.1 + $-1.0
% of GDP 100.00% = 68.04% + 18.75% + 17.22% + -4.01%
Contribution to GDP Growth % 6.98% = 2.12% + 5.38% + -0.45% + -0.07%


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

Q4-2021 Q3-2021 Q2-2021 Q1-2021 Q4-2020 Q3-2020 Q2-2020 Q1-2020 Q4-2019 Q3-2019 Q2-2019 Q1-2019
Total GDP Growth 6.98% 2.30% 6.72% 6.28% 4.54% 33.79% -31.24% -5.13% 1.89% 2.77% 3.22% 2.41%
Consumer Goods 0.36% -2.21% 2.99% 5.69% -0.07% 9.92% -1.89% 0.04% 0.35% 0.99% 1.42% 0.29%
Consumer Services 1.76% 3.57% 4.93% 1.75% 2.34% 15.59% -22.21% -4.83% 0.77% 1.13% 0.95% 0.14%
Fixed Investment 0.48% -0.16% 0.61% 2.25% 2.92% 4.88% -5.63% -0.41% -0.19% 0.54% 1.06% 0.64%
Inventories 4.90% 2.20% -1.26% -2.62% 1.10% 6.84% -4.01% -0.51% -0.99% -0.32% -0.57% 0.49%
Government -0.45% 0.17% -0.36% 0.77% -0.09% -0.19% 0.97% 0.63% 0.52% 0.36% 0.86% 0.47%
Exports 2.35% -0.59% 0.80% -0.30% 2.07% 4.64% -8.34% -1.95% 0.17% -0.08% -0.26% 0.36%
Imports -2.42% -0.68% -0.99% -1.26% -3.73% -7.89% 9.87% 1.90% 1.26% 0.15% -0.24% 0.02%
Real Final Sales 2.08% 0.10% 7.98% 8.90% 3.44% 26.95% -27.23% -4.62% 2.88% 3.09% 3.79% 1.92%




Summary and Commentary

The key points of this report are unchanged from the report issued four weeks ago:

-- US economic growth in the fourth quarter of 2021 is materially misrepresented by the headline number. And people on the street would know it, if they had any reason to pay any attention to this report in the first place.

-- The BEA's own "bottom line" number ("Real Final Sales") is less than a third of the headline at 2.08%, and even that is significantly boosted by under-reported inflation.

-- Inventory growth may pad the headline number, but it does not signal a healthy consumer sector. Inventories are a long term zero-sum series, so what they add to the headline in one quarter will certainly be subtracted away in future quarters. In this case retailers simply over-stocked for the holiday season in anticipation of both "supply chain" issues and a surge in consumer spending -- that ultimately never materialized.

-- The root cause of most of the above are disposable incomes that are not keeping pace with inflation.

Reporting from the BEA should be better than this. Unfortunately there is little political will or pressure to fix overly rosy economic reports.

And reports from the BEA should be more timely than this. This report is rehashing a quarter now 60 to 150 days in the rear view mirror. We would be far better off learning what was happening to the economy in January.
 
     

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