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According
to the
Bureau
of Economic Analysis’ (BEA) “preliminary” estimate, 3Q2014 growth in real
U.S. gross domestic product (
GDP) was
upwardly revised to a seasonally adjusted and annualized rate of 3.9% -- up roughly
0.4 percentage point above the first (“advance”) 3Q estimate but 0.7% below 2Q’s
4.6%. This revision “
slammed”
expectations of a decline to 3.3% (ranging from +2.8 to 3.8%). All four
categories -- personal consumption expenditures (PCE), private domestic
investment (PDI), net exports (NetX), and government consumption expenditures
(GCE) -- contributed to 2Q growth.
The
categorical contributions to the headline number bear little resemblance to
last month’s report. For example:
--
The significant inventory draw-down reported a month ago almost vanished (dropping
to a mere -0.12% impact on the headline number, compared to -0.57% last month).
--
Improving fixed investments added +0.23% to the headline (from +0.74 to 0.97%),
with nearly all of that improvement from spending for commercial equipment.
--
Consumer spending for goods was also reported to be growing by an additional +0.27%
in this report (from +0.70 to 0.97%), while consumer spending for services was
essentially unchanged (+0.02%).
--
Finally, while exports were revised modestly lower (from +1.03 to 0.65%), a
small decline in imports (from +0.29 to 0.12%) partially offset the net decline
in trade’s contribution.
For
this report the BEA bumped up its estimate of annualized net aggregate
inflation (to 1.40% instead of the “advance” report’s 1.28%). 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 5.42%; if using the
BPP inflation rate, growth would have been 5.52%.
Growth
in real final sales of domestic product, the BEA’s “bottom line” indicator of
economic health (which excludes the ever-volatile inventories) was shaved to 4.1%
(from 4.2% last month).
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--
As mentioned last month, the Federal Reserve’s argument for completing its QE
taper was strengthened. An economy growing at 3.9% is presumably healthy enough
to be “weaned” off central bank stimulus.
--
Rapidly changing dollar-based commodity prices (and more specifically energy
prices) are likely playing havoc with both the BEA’s inventory and net
import/export data, both of which changed materially in this revision. While
one might expect inventories to be valued exclusively using some variation of
book-value FIFO accounting logic, they are in fact additionally impacted by an “inventory
valuation adjustment” (or “IVA”) that utilizes price changes from a “Fisher
formula” (that according to the BEA’s notes “incorporates weights from two
adjacent quarters; quarterly indexes are adjusted for consistency to the annual
indexes before percent changes are calculated”) when converting inventory
values from “nominal” to “real.” For this reason, rapidly changing dollar-based
price levels can cause “real” inventories and net import/export data to
fluctuate even if physical quantities remain relatively constant -- providing
temporary “noise” that duly reverses in subsequent quarters.
--
From a global perspective, this reported growth is extraordinary. Again at face
value, this report shows an economy isolated (if not benefiting through falling
dollar-based commodity prices) from softening global economies.
--
That said, consumers are not spending as if the U.S. economy is healthy and
sustainable. Consumers generated well less than half of the headline growth
even though they are still over two-thirds of the economy. And half of the
previously reported growth in real per-capita disposable income vanished in
this revision -- explaining to some extent why consumers have remained wary.
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.
