3Q2014 Gross Domestic Product: Third (Final) Estimate

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According to the Bureau of Economic Analysis’ (BEA) “final” estimate, 3Q2014 growth in real U.S. gross domestic product (GDP) was upwardly revised to an astounding seasonally adjusted and annualized rate of 5.0% -- roughly 1.04 percentage point above the second (“preliminary”) 3Q estimate and 0.4 percentage point higher than 2Q’s 4.6%. Analysts had expected a more modest revision to 4.3% (ranging from +4.0 to 4.5%). All four categories -- personal consumption expenditures (PCE), private domestic investment (PDI), net exports (NetX), and government consumption expenditures (GCE) -- contributed to 3Q growth. Consumer Metrics Institute provided in-depth analysis of the components of change in this report:  

* Consumers’ goods-and-services contribution to the headline number was 2.21%, +0.46% from 2Q. Consumer expenditures for goods added 1.06% (+0.09% from the previous estimate, but -0.27% from 2Q).

* The contribution made by consumer services spending to the headline surged to 1.15% (+0.61% from the previous report and +0.73% from 2Q’s 0.42%). Approximately two-thirds ($12.1 billion of $18.6 billion) of additional GDP from consumer spending in this revision can be traced back to health insurance premiums. 

* Commercial private fixed investments provided +1.21% of the headline number (-0.24% from 2Q’s 1.45%), and this continued positive growth is nearly all non-residential. The increases shown in this report came almost equally from spending on structures and the recently added intellectual property category.

* Inventories subtracted only -0.03% from the headline number (-1.45% from 2Q).

* Governmental spending added +0.80% to the headline. The growth in Federal spending was probably pulled forward from 4Q as a result of fiscal year-end budgetary maneuvers -- and is therefore also likely to reverse in 4Q2014.

* Exports are now reported to be adding 0.61% to the headline growth rate (-0.04% from the previous estimate and -0.82% from 2Q).

* Imports added +0.16% to the headline number (+0.04% from the previous estimate, and +1.93% from 2Q).

* The annualized growth rate for the "real final sales of domestic product" is now reported to be 4.99% (+0.98% from the previous report). This is the BEA's “bottom line” measurement of the economy, and it is slightly higher than the headline GDP number (+4.96%) because of the mildly shrinking inventories.

For this report the BEA estimated annualized net aggregate inflation at 1.39% (essentially unchanged from the last month’s 1.40%). By comparison, the growth rate of the Bureau of Labor Statistics’ concurrent seasonally adjusted CPI-U index was -0.10% (annualized); meanwhile, the price index reported by the Billion Prices Project (BPP) was -0.18%. Were the BEA’s nominal estimates corrected for inflation using the CPI-U, real 3Q GDP would have grown by 6.52%; if using the BPP inflation rate, growth would have been 6.60%. 

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CMI posed some points worth pondering:

* The puzzle in these numbers lies in the huge discrepancy between the reported face value of the economy's growth (nearly 5% per annum, sustained for at least two quarters) and the continued public proclamations from the Federal Reserve that the economy still requires further stimulus in the form of extraordinarily low interest rates.

* Is increased consumer spending on non-discretionary healthcare (apparently at the expense of household savings, which fell to the lowest rate in a year) good for the overall economy? Said another way, is this growth sustainable if real household disposable income continues to shrink ($373 less in real annualized per capita disposable income relative to 4Q2012)?

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.