Ignore the Headline, Real GDP is Much Worse Than It Looks

Mish

The initial estimate of 4th-Quarter GDP was 2.1%, about where analysts expected. but the details are another matter.

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.

Notable Items

  • 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)

  1. GDP Reveal a Business Recession Beneath the Surface
  2. 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
  3. Business investment contracted at a 1.5% annualized pace, the third decline in a row – a string we last saw in the Great Recession
  4. The consumer weakened inQ4to a 1.8% annual rate from 3.2% the prior quarter
  5. 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

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Check out Line 7 and 22 of the Report

Of Durable Goods Orders (and How to Buy an Election)

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Regarding line 22, please recall my January 28 post Of Durable Goods Orders (and How to Buy an Election)

Mike "Mish" Shedlock

Comments (21)
No. 1-14
Tony Bennett
Tony Bennett

All you need to know on "quality" of growth.

BEA: Current-dollar GDP increased 3.6 percent, or $191.7 billion, in the fourth quarter to a level of $21.73 trillion.

per Monthly Treasury Statement - fedgov deficit for Q4 ... $356.578 billion.

And factor in the ever escalating debt for households, business, state & local govts ....

Tony Bennett
Tony Bennett

Nominal growth consensus was 4.1% (with deflator of 2.0%).

Deflator was laughably low 1.4% ... leaving nominal growth only 3.5%.

Casual_Observer
Casual_Observer

Headed to < 1% growth for Q1 because of nCoV. We will soon find out if stall speed is an actual thing or not when rates are ~1.25%

Curious-Cat
Curious-Cat

"Real GDP is much worse than it looks?"

I don't understand. I thought China was the only country that lied about its economic numbers. /sarc

Bam_Man
Bam_Man

Maybe having to spend $20,000 for a high-deductible family health insurance plan doesn't leave much for "discretionary spending"?

Realist
Realist

After 10 years of roughly 2% growth, I expect 10 years of roughly 1% growth, on average. High debt levels, expensive/wasteful health care and military, mal investment, restrictive trade policies, beggar-thy-neighbour policies, etc.

Not that the US government, the Fed, etc, won’t try to keep pushing on a string. They will do everything they can to keep things moving along. It’s just that they will get less and less growth for their efforts.

And the debt will continue to grow, which will only hurt future growth even more. Longer term, expect growth to average zero.

Deficit of over 1 trillion after 10 years of growth. I guess those tariffs aren’t “paying off” the debt after all. LOL

Jackula
Jackula

One of my personal indicators; more used cargo vans for sale on craigslist here in Los Angeles

Six000mileyear
Six000mileyear

Boeing's sales were down 35% YoY ($10B) for the last quarter due to the Max disaster. Layoffs at suppliers have already started. One should expect the GDP to head lower and a recession entered this year.

TheLege
TheLege

"... generated almost entirely from a huge uptick in imports 'growth' …."

Can someone explain how imports add to GDP? I thought imports subtracted from GDP i.e. exports less imports is added to calculate GDP ..

Herkie
Herkie

Great, I have a contract on a house in Florida and the going rate for a 30 year VA mortgage as of today (Navy Federal Credit Union) is 3.275% and I just think that is ghastly and outrageous considering for the vast majority of my 62 years the mortgage rate was right about the 10 year Treasury + 100 basis points. And the 10 year was at 1.50% today. Meaning the 30 year mortgage rate should be 2.5%, and the VA even lower.

Of course houses are all grossly overpriced as well, but in the last few weeks I have come to the conclusion that the Fed intends to get much higher inflation (Powell said so yesterda and that makes me think there will be a surprise cut next month).

That would make even overpriced RE a decent hedge against inflation and I do not close till the first week of April. Now what I can afford to eat may become a problem. I mean I went to the store for a few things yesterday and left without most of them. When you reach for an item on the shelf and withdraw your hand as if it were scalded because the price is anywhere from 25% higher to double what it was just back before Christmas a whole 5 weeks ago it has that effect.

bradw2k
bradw2k

"For this estimate the BEA assumed an effective annualized deflator of 1.50%."

That seems like the big little lie right there. Mish, any idea how they justify a deflator that is less than half of BLS's CPI-U number?

lol
lol

Propaganda ministry has decreed goin forward all 2's all the time (permanently),like the permanent trillion dollar annual deficit regardless of how many trillions big gov borro every year....it will be "officially"a 1 trillion dollar annual deficit!

SnakeeyesVA
SnakeeyesVA

It was a bad report, heavily dependent on imports. Which will evaporate in Q1 thanks to Coronavirus hysteria.

GoodTimes32
GoodTimes32

Confidence still seems high in my local NC market as it relates to small business marketing spending. As for consumer goods spending, the 25% import tariffs are most likely having a bit of a slowing affect on our economy - holding back expansion. https://www.enpeakgroup.com/


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