4Q2012 Gross Domestic Product: Third (Final) Estimate

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The Bureau of Economic Analysis (BEA) estimated 4Q2012 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of +0.4 percent, nearly 0.3 percentage point higher than the previous (preliminary) 4Q estimate and 2.7 percentage points lower than the current 3Q estimate. Personal consumption expenditures (PCE), net exports (NetX) and private domestic investment (PDI) added to 4Q growth, in that order; government consumption expenditures (GCE) -- especially defense-related purchases -- dragged on growth. We should emphasize that this report merely represents an improved understanding of 4Q2012 data, not improved economic activity.

Although the headline number showed both an upward revision and positive growth, Consumer Metrics Institute (CMI) pointed out the 0.4 percent number is statistically indistinguishable from a stalled economy. The positive revisions came primarily from fixed investments, with "less negative" exports providing an additional boost. Consumer activities were marginally weaker than previously reported, and governmental spending continued to shrink.

For this revision the BEA assumed annualized net aggregate inflation of 0.97 percent. In contrast, during 3Q the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) recorded a -0.75 percent annualized inflation rate. As a reminder: an overstatement of assumed inflation decreases the reported headline number -- and in this case the BEA's relatively high deflator (more than 1 percent above the CPI-U) trimmed the headline GDP growth estimate. If the CPI-U had been used to convert the "nominal" GDP numbers into "real" numbers, the reported headline growth rate would have been a 1.51 percent growth rate. If data for online prices from the Billion Prices Project had been used to deflate the BEA's nominal data, the growth rate would have been 1.35 percent annualized.

Previously reported improvements in real per capita disposable income were essentially sustained, with the annualized growth rate for per-capita disposable income a still-healthy +5.36 percent. More than half of this increase in disposable income was offset by increased personal savings (up about $131 billion per year -- or roughly 1 percent of GDP), however, as households spent cautiously in anticipation of the fully restored FICA deductions that will take back most of the 4Q's net disposable household cash gain during 1Q2013.

Among the notable items in the report (again, from CMI):

-- The contribution of consumer expenditures for goods to the headline number was revised downward slightly to 1.02 percent (from 1.03 percent in the previous estimate).

-- The contribution made by consumer services dropped by over a third to 0.27 percent (down from 0.44 percent previously reported).

-- The growth rate contribution from private fixed investments was up sharply to 1.69 percent (from 1.36 percent in the previous report), providing more than the entire boost to the headline number. Instead of productive capital spending, though, all of that revision was in non-residential construction (i.e., commercial real estate, which has grown back to its highest "real" level of activity since 2Q2009).

-- Inventory draw-downs moderated slightly, removing -1.52 percent from the headline number (-1.55 percent previously). Since the inventory data in the BEA's reports are often impacted significantly by not-fully compensated commodity price changes, it is difficult to tease out of these numbers the true source of any changes (e.g., uncorrected oil pricing anomalies or genuine changes to supply chain stocks and/or manufacturing schedules).

-- The previously reported sharp contraction in government spending became even slightly more negative, removing -1.41 percent from the headline number.

-- Declining exports removed -0.40 percent from the headline number (an improvement, however, of +0.15 percent from the -0.55 percent negative contribution previously reported). The net drag from exports continues to be consistent with a generally weakening global economy, and is a trend we might expect to have been continuing in the current quarter.

-- And reduced imports actually added +0.73 percent to the headline growth rate (down slightly from the 0.79 percent in the previous report). Again, this shows as a positive component in the GDP equation even though weakening demand for imports is often actually a sign of a slowing economy.

-- The annualized growth rate of "real final sales of domestic product" was revised upward to 1.90 percent, still some -0.46 percent below the prior quarter. This is the BEA's "bottom line" measurement of the economy.

-- And real per-capita disposable income was revised downward a net $35 to $33,138 per year (although that revised number is still about $430 per year above the numbers published for 3Q2012. From an economic standpoint however, a significant share of that was absorbed when the personal savings rate soared from 3.6 percent to 4.7 percent, pulling $365 of that annual improvement into savings or deleveraging activities instead of consumptive spending. 

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Expectations for 1Q2013 vary widely. The U.S. is expected to expand at a 2.5 percent rate, according to a MarketWatch forecast, "though a large slice of the gain could stem from higher inventories and a snap-back in government spending." Karl Denninger is less sanguine, however. After highlighting the following sentence from the BEA’s report: “Current-production cash flow (net cash flow with inventory valuation adjustment) -- the internal funds available to corporations for investment -- decreased $89.8 billion, in contrast to an increase of $32.5 billion,” Denninger commented, “That's not what you want to see; cash flow is the 'real deal' and it does not look positive at all.”

“At the end of the day only profits matter and corporations have been floating higher in stock price based on squeezing every possible gain out of their people and process,” Denninger continued. “That must eventually end simply due to the lack of additional fat to be cut and we've been running into the end of that now for the last six to nine months, with the inevitable push-back coming now from a roundly abused labor force.” MarketWatch agreed, saying that, “The sluggish growth in wages, combined with recent payroll tax increases and higher gas prices, could act as a drag on consumer spending. Americans could also decide to set more money aside to rebuild a low savings rate.”

“Facing the economy is a triple-whammy in the form of relentless currency debasement engaged in by [Fed Chair] Bernanke that has trashed consumer purchasing power (witness the unbridled rise in both disability claims and food stamps; there's no 'recovery' evident in either of those programs!), the flat population employment ratio that confirms people are not being hired at a rate sufficient to reduce government dependency and grow organic final demand along with historically high and unsustainable margins,” Denninger concluded.

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.