3Q2012 Gross Domestic Product: Third (Final) 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 3.1 percent, an upward revision of 0.4 percentage point from the previous 3Q estimate, and 1.8 percentage points higher than the current 2Q estimate. Personal consumption expenditures (PCE), private domestic investment (PDI), government consumption expenditures (GCE) and net exports (NetX) contributed to 3Q growth, in that order.
 

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Consumer Metrics Institute (CMI) provided useful commentary about the GDP report, some of which is reproduced below:

* The contribution of consumer expenditures for goods to the headline number was revised upward to 0.85 percent (from 0.83 percent in the previous report).

* The contribution made by consumer services increased to 0.26 percent -- up from the 0.16 percent in the previous report.

* The growth rate contribution from private fixed investments was largely unchanged at 0.12 percent (up slightly from 0.10 percent in the prior report).

* The contribution from inventories remained relatively high (+0.73 percent), providing about a quarter of the headline number. Over time inventory growth should be a nearly zero-sum game, and presumably this quarter's growth from inventory building will be offset in future quarters by reduced production to shrink excessive inventories.

* From a long-term perspective, the biggest change in the third quarter's economy came from sharply increasing governmental expenditures. Growth in government spending at all levels is now reported to have added +0.75 percent to the headline number after subtracting -0.60 percent as recently as 1Q2012.

* Exports added more than a quarter of a percent to the headline number (+0.27 percent). The improving export picture seems to imply an improving global economy despite any number of reports to the contrary.

* And reduced imports actually added +0.11 percent to the headline growth rate (a change in direction from the -0.02 percent previously reported).

* The annualized growth rate of "real final sales of domestic product" was revised sharply upward to 2.36 percent, some 0.46 percent above the prior report and now at the same level as reported for 1Q2012.

* Real per-capita disposable income was down $20 during the quarter (to $32,691 per year). This is down $73 from the $32,764 reported for 1Q2011, now some six quarters ago. The reported annualized contraction rate of -0.24 percent benefits from the relatively low deflators used by the BEA. If per-capita disposable income were "deflated" using the BLS CPI-U (which presumably is what consumers actually experience when spending their incomes) the annualized contraction rate for per capita consumer spending power is more like -3.65 percent.

CMI summarized the report, including “issues that merit caution moving forward” as follows:

* About a quarter of the headline growth rate came from a surge in governmental spending.

* Inventory growth also contributed about a quarter of the headline growth rate. The BEA's inventory valuations are notoriously dependent on the deflators used, and the wild fluctuation of these numbers from earlier reports raises at least some concerns about their credibility. But even assuming that the reported numbers are correct, substantial growth in current inventories does not bode well for factory production schedules in future quarters.

* The continued contraction of per-capita disposable income means that households are under sustained pressure. Any growth in consumer spending is not coming from fatter paychecks -- it is coming instead from other sources, including refinancing, strategic defaults, reduced personal savings (which now reportedly shrank by $25.9 billion during the quarter) and increased student loans.


The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.