Ignore the Headline, Real GDP is Much Worse Than It Looks
Real Gross Domestic product (GDP) increased at an annual rate of 2.1 percent in the fourth quarter of 2019 according to the "Advance" GDP Estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.1 percent. For the year, Real GDP increased 2.3 percent in 2019 compared with an increase of 2.9 percent in 2018.
Consumer Metrics Comments
Rick Davis at the Consumer Metrics Institute has some choice comments.
This is one of the more misleading headline numbers we have ever seen. It simply does not reflect the overall weakness in the data. The key growth of consumer spending was down nearly a full percentage point (-0.91pp) from the prior quarter. Commercial and private fixed investments were stagnant, and inventories were being allowed to contract. The healthy headline number is generated almost entirely from a huge uptick in imports 'growth' and an implausibly low inflation deflator.
For this estimate the BEA assumed an effective annualized deflator of 1.50%. During the same quarter the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was significantly higher at 3.39%. Under estimating inflation results in optimistic growth rates, and if the BEA's nominal data was deflated using CPI-U inflation information the headline growth number would have been a minuscule 0.22%.
Some people will take the BEA's "bottom line" number from the report (their "Real Final Sales of Domestic Product") at it's very attractive face value of +3.17% growth. If so, they will be seriously misled. Neither consumers or fixed investments are driving the headline number. Because of that, the cosmetics of this report are far more glamorous than the reality would suggest.
- Consumer spending for goods was reported to be growing at a 0.26% rate, down -0.83pp from the prior quarter.
- The contribution to the headline from consumer spending on services was reported to be 0.94%, down -0.08pp from the prior quarter. The combined consumer contribution to the headline number was 1.20%, down -0.91pp from the prior quarter.
- The headline contribution for commercial/private fixed investments was reported to be 0.01%, up 0.15pp from the prior quarter.
- Inventories subtracted -1.09% from the headline number, down -1.06pp from the prior quarter. It is important to remember that the BEA's inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity pricing or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.
- The contribution to the headline from governmental spending was reported to be 0.47%, up 0.17pp from the prior quarter. That growth was evenly split between Federal and state or local spending.
- The contribution from exports was reported to be 0.17%, up 0.06pp from the prior quarter.
- Imports added 1.32% annualized 'growth' to the headline number, up 1.58pp from the prior quarter. Note that in the BEA's calculation matrix the consumption of imports subtracts from domestic production, and 'growth' in this line actually reflects either foreign exchange swings or weakening domestic demand for foreign goods. In aggregate, foreign trade contributed a net 1.49pp to the headline number.
- The annualized growth in the 'real final sales of domestic product' was reported to be 3.17%, up 1.05pp from the prior quarter. This is the BEA's 'bottom line' measurement of the economy (and it excludes the inventory data).
- Real per-capita annualized disposable income was reported to have increased by $111 quarter to quarter. The annualized household savings rate was 7.7% (down -0.1pp from the prior quarter). In the 46 quarters since 2Q-2008 the cumulative annualized growth rate for real per-capita disposable income has been 1.50%.
David Rosenberg Comments (Emphasis Mine)
- GDP Reveal a Business Recession Beneath the Surface
- All anyone needs to know from today's GDP report is that real private final sales slowed to a four-year low of 1.4% at an annual rate from 2.3% in Q3
- Business investment contracted at a 1.5% annualized pace, the third decline in a row – a string we last saw in the Great Recession
- The consumer weakened inQ4to a 1.8% annual rate from 3.2% the prior quarter
- It's never a very bullish event when virtually all the GDP growth in a given quarter is centered in more government spending and the statistically positive contribution from slumping imports
The above points are from today's Rosenberg commentary "Deep Dives and Market Movers".
In regards to point 2, Rick Davis' 3.17% is for real final sales of domestic product. Whereas Rosenberg's comment pertains to real final sales to private domestic purchasers.
Government Consumption Expenditures and Private Investment
Check out Line 7 and 22 of the Report
Of Durable Goods Orders (and How to Buy an Election)
Regarding line 22, please recall my January 28 post Of Durable Goods Orders (and How to Buy an Election)
Mike "Mish" Shedlock