3Q2012 Gross Domestic Product: First (Advance) Estimate

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The Bureau of Economic Analysis (BEA) estimated 3Q2012 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of 2.0 percent, up 0.7 percentage point from the third (“final”) estimate for 2Q. Personal consumption expenditures (PCE), government consumption expenditures (GCE) and private domestic investment (PDI) contributed to 3Q growth, in that order; net exports (NetX) exerted a small “drag.”
 

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Consumer Metrics Institute (CMI) made the following observations about the GDP report:

-- The BEA assumed annualized net aggregate inflation of 2.89 percent. In contrast, the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) for 3Q recorded a substantially higher 4.98 percent annualized inflation rate. As a reminder: an understatement of assumed inflation improves the reported headline number -- and in this case the BEA's low deflator (more than 2 percent below the CPI-U) significantly boosted the published headline rate. If the CPI-U had been used to convert the nominal GDP numbers into "real" numbers, the reported headline would have shown an economy contracting at a -0.02 percent rate.

-- The annualized growth rate of consumer expenditures for goods strengthened markedly, contributing 1.03 percent to the headline number (up 0.95 percent from the essentially flat reading for the prior quarter, but down slightly from 1Q2012).

-- The contribution made by consumer services dropped noticeably to 0.39 percent, off sharply from the 0.99 percent recorded during the previous quarter.

-- The growth rate contribution from private fixed investments dropped again to 0.20 percent (down -0.36 percent from 2Q and about a full percent lower than 1Q).

-- Inventories continued to shrink, although the pace moderated. The contraction of inventories removed -0.12 percent from the headline number, an improvement from the -0.46 percent drag recorded in 2Q.

-- The most surprising change in the economy came from sharply increasing governmental expenditures. Growth in government spending was reported to have added 0.71 percent to the headline number, the first "positive" contribution in over two years. All of that growth came from Federal spending, while the state and local contribution to the headline remained essentially flat (-0.01 percent).

-- Shrinking exports pulled the headline number down by -0.23 percent, a remarkable change from the 0.72 percent boost provided in 2Q. Clearly the weakening global economy is starting to impact the U.S. economy.

-- And shrinking imports actually added 0.04 percent to the growth rate. This also is a reversal from the -0.49 percent drag during 2Q. Although reduced imports help the headline number mathematically, they are ultimately a sign of weakening domestic demand.

-- The annualized growth rate of "real final sales of domestic product" was revised upward to 2.14 percent, some 0.42 percent above the prior quarter but still below the 2.36 percent reported for 1Q2012.

-- Real per-capita disposable income was down $1 during the quarter (to $32,778 per year, up only $14 per year from the $32,764 reported for 1Q2011, now some six quarters ago).

CMI also listed a few “surprises in the new numbers that probably merit caution moving forward:”

-- Over 30 percent of the headline growth rate came from a $27 billion surge in Federal defense spending, possibly an artifact of fiscal year budgetary manipulations and advance contracting in anticipation of the "fiscal cliff."

-- The sharp contraction in exported goods is not a good sign for the economy. This was the largest contraction in exports since 1Q2009, and it is certainly a sign that the U.S. economy is not immune to contagion from overseas.

-- The contraction of per-capita disposable income simply means that households continue to be under pressure. As we have argued before the growth of consumer spending is not coming from fatter paychecks; it is coming instead from other sources, including refinancing, strategic defaults and student loans.