4Q2021 Gross Domestic Product: Third Estimate

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In its third estimate of 4Q2021 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) fine-tuned the growth rate of the U.S. economy to a seasonally adjusted and annualized rate (SAAR) of +6.89% (+7.1% expected), down 0.10 percentage point (PP) from the second estimate (“4Qv2”) but +4.58PP from 3Q2021.

As with 4Qv2, two groupings of GDP components -- personal consumption expenditures (PCE) and private domestic investment (PDI) -- were the drivers behind the 4Q expansion; net exports (NetX) and government consumption expenditures (GCE) detracted from the headline. Overall, the update primarily reflected downward revisions to consumer spending and exports that were partly offset by an upward revision to inventory investment. Imports (a subtraction in the calculation of GDP) were also revised up. As for details (all relative to 4Qv2):

PCE (-0.37PP). The downward revision to consumer spending (-$21.3 billion, nominal) was led by health care (-$10.6B) and transportation services (-$10.2B). Downward revisions to goods spending (-$5.4B) was concentrated in food and beverage purchases (-$2.9B), other nondurable goods (-$1.2B) and motor vehicles and parts (-$1.1B).

PDI (+0.44PP). Upward revisions (+$26.1B) to PDI were dominated by the change in private nonfarm inventories (+$24.2B). Residential fixed investment was revised up by $2.5B.

NetX (-0.16PP). Exports of services were cut by $7.5B while goods imports were revised up by $3.1B.

GCE (-0.01PP). Virtually all revisions to this category (-$1.1B) occurred in state and local level consumption expenditures (-$1.6B).

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According to Consumer Metrics Institute’s Rick Davis, the key points of this report can be summarized as follows:

-- The headline number “grossly” misrepresents 4Q2021 U.S. economic growth.

-- With this revision, the BEA’s own bottom-line number (Real Final Sales) is less than a quarter of the grossly inflated headline at 1.57% (down 0.52PP from 4Qv2), and even that is significantly boosted by under-reported inflation. (The BEA assumed an effective annualized deflator of 7.14%, far lower than the Bureau of Labor Statistics’ CPI of 8.91%.)

-- Our repeated story for 4Q2021 has been that, although inventory growth may pad the headline number, it does not signal a healthy consumer sector. And sadly, inventories are a long-term zero-sum series, so that what they add to the headline in one quarter will certainly be subtracted away in future quarters. And according to the Atlanta Fed’s GDPNow forecasts, that day of reckoning is only about 30 days out -- arriving with BEA’s preliminary report for 1Q2022.

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.