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Thursday, March 27, 2014

4Q2013 Gross Domestic Product: Third (Final) Estimate

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The Bureau of Economic Analysis (BEA) nudged its “final” estimate of 4Q2013 growth in real U.S. gross domestic product (GDP) up slightly, from a seasonally adjusted and annualized rate of 2.4 percent (reported at the end of February) to 2.6 percent. Three of the four categories -- personal consumption expenditures (PCE), private domestic investment (PDI) and net exports (NetX) contributed to 4Q growth; government consumption expenditures (GCE) subtracted from growth.
The improvement in this revision’s headline growth came almost entirely from the BEA’s reassessment of consumer spending on services (+0.57 percentage point, mostly from increased spending on health care). Offsetting that increase were downward adjustments to consumer spending on goods (-0.06 percent), the growth rate for inventories (-0.16 percent and is now reported to be in slight contraction) and fixed investment (-0.15 percent). Exports and imports received only minor adjustments.
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For this report the BEA assumed annualized net aggregate inflation of 1.56 percent. By way of comparison, the growth rate of the Bureau of Labor Statistics’ seasonally adjusted CPI-U index was slightly lower (1.46 percent annualized rate); meanwhile, the price index reported by the Billion Prices Project (BPP) was substantially higher at 2.46 percent. Were the BEA’s numbers corrected for inflation using the BPP inflation rate, the 4Q real GDP growth rate would have been only 1.78 percent.
As mentioned above, one of the more noteworthy components of this revision is that inventories are now reported to be contracting at a marginal pace -- subtracting 0.02 percent from the headline growth rate (down -1.65 percent from 3Q). The prior three quarters saw substantial inventory expansion that had boosted the reported annualized growth rate by an average of 1 percent.
Looking forward to the 1Q2014 GDP report, Consumer Metrics Institute (CMI) made these observations:
  • The year-long cycle of inventory building has apparently come to an end. Dating back to 1Q2006, the reported average real annualized growth rate of inventories has been a relatively neutral +0.04 percent. This is not surprising because over an extended time period inventories are mostly a cyclical zero-sum game, with excessive growth or contraction in any one period being corrected during subsequent periods. Moving forward we should expect that inventories will continue their cyclical transition from building to contraction, with negative consequences to the headline number.
  • The federal government’s “shutdown” subtracted roughly 1 percent from 4Q2013’s reported growth rate. If federal spending simply reverts to the prior quarter’s level, we might expect a roughly 1 percent boost to the headline number. On the other hand, if the federal budget experienced a “catch-up” effect from sequestered spending that was merely pushed into 1Q2014, we could see yet another quarter’s report distorted by the “shutdown” -- this time with the 1Q2014 shoved firmly to the upside.
  • The headline growth contribution from commercial fixed investment dropped over 2 percent from quarter to quarter, and it was sustained largely by spending on equipment (healthcare and transportation) -- with spending on structures actually contracting slightly. Residential housing construction flipped to significant contraction after 12 consecutive quarters of growth.
  • Although the growth contribution from imports is at about the long term average, exports are currently growing at about twice their longer term average. Sustained long term growth in exports requires healthy and growing trading partners. Given softening growth in a number of our trading partners, this historically high growth rate for exports may not be sustainable.
  • Household income shows no signs of recovery. Real per-capita income remains stagnant quarter to quarter, and down substantially year over year. It bears repeating that total real per-capita income growth since 2Q2008 has been 0.73 percent -- an average annualized growth rate of just 0.13 percent during the entire “recovery.” The household savings rate is down over 2.3 percent year over year, and it remains well below the historical long term savings rate.
  • Ominously, the just reported upside revision to “growth” in consumer spending was caused by an increased real cost of household healthcare. And in 4Q2013 the ObamaCare launch was just sputtering, at best. We should expect consumer spending on services to continue to grow in 1Q2014, largely as a result of non-discretionary healthcare expenses. But given stagnant household income, all of that heavily promoted spending for new coverage through health care exchanges has got to come from somewhere -- with both household discretionary spending and savings taking it on the chin as net spending further transfers to the healthcare industries.

“The next GDP report (the first estimate for 1Q2014) will certainly be interesting,” CMI concluded. “It might well be distorted by the bounce-back in Federal spending, and it could reflect ongoing softening of commercial spending for inventories and fixed investments. It will also begin to display the impact of the new healthcare initiatives on household spending and the overall structure of the economy.”
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.

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