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Consumer Metrics Institute BEA Revises 1st Quarter 2016 GDP Growth Upward To +0.82%

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#1 Lee Adler

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Posted 27 May 2016 - 12:00 AM

(If the tables or charts in this report do not seem to be presented correctly, please click here or navagate to http://www.consumeri...commentary.html to see this commentary as a Web Page.)

In their second estimate of the US GDP for the first quarter of 2016, the Bureau of Economic Analysis (BEA) revised the growth rate upward to +0.82%, up 0.28% from their previous estimate but still down -0.56% from from the +1.38% rate recorded for the fourth quarter of 2015.

Roughly half of the upward revision came from inventory adjustments, which were reported to have contracted at a -0.20% annualized rate -- an improvement of +0.13% from the -0.33% previously reported and about the same as the prior quarter's -0.22% contraction rate. None of the other line items were revised by more than 0.06% either way.

The BEA's treatment of inventories can introduce noise and seriously distort the headline number over short terms -- which the BEA admits by also publishing a secondary headline that excludes the impact of inventories. The BEA's "bottom line" (their "Real Final Sales of Domestic Product") improved +0.15% to +1.02%, although that was still down -0.58% from the prior quarter.

Annualized household disposable income improved significantly in this revision. Real annualized per capita disposable income was reported to be $38,710 per annum, up $199 per year from the previous estimate. The household savings rate also sharply increased to 5.7%.

For this revision the BEA assumed an effective annualized deflator of 0.61%. During the same quarter (January 2016 through March 2016) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was mildly dis-inflationary at -0.20%. Over estimating inflation results in correspondingly pessimistic growth rates, and if the BEA's "nominal" data was deflated using CPI-U inflation information the headline growth number would be a significantly better +1.63%.

Among the notable items in the report :

-- The headline contribution from consumer expenditures for goods improved slightly to +0.09% growth (although that figure still represented a -0.27% decline from the prior quarter).

-- The contribution to the headline from consumer services was revised down further to +1.20% (down +0.10% from the fourth quarter). The combined consumer contribution to the headline number was +1.29%, down -0.37% (about one-fourth) from 4Q-2015 -- which in turn was down one-fourth from 3Q-2015. This report represents the third consecutive quarter of materially weaker growth in consumer spending.

-- The headline contribution from commercial private fixed investments remained negative at -0.25%, down -0.31% from the prior quarter.

-- The contribution from inventories remained negative, subtracting -0.20% from the headline number. This was essentially flat from the -0.22% recorded in 4Q-2015. It bears repeating that the BEA's inventory numbers are exceptionally noisy, subject to significant distortions/anomalies caused by commodity price swings while representing a zero reverting (and long term zero sum) series.

-- In this revision Governmental spending was unchanged, adding +0.20% to the headline. This growth was entirely due to increased capital spending at state and local levels, with Federal spending actually contracting -0.11%.

-- The contribution to the headline number from exports remained in contraction at -0.25% (flat relative to the prior quarter).

-- Imports added +0.03% to the headline number, down -0.08% from the somewhat greater growth reported for the prior quarter.

-- The "real final sales of domestic product" improved +0.15% to +1.02%, although that was still down a significant -0.58% from the prior quarter, and down -1.68% from 3Q-2015. This is the BEA's "bottom line" measurement of the economy and it excludes the reported inventory contraction.

-- As mentioned above, real per-capita annual disposable income was reported to be up $199 in this report, and the household savings rate increased significantly in concert with the strengthening incomes. It is important to keep this line item in perspective. Real per-capita annual disposable income is up only +5.54% in aggregate since the second quarter of 2008 -- a meager annualized +0.70% growth rate over the past 31 quarters.

The Numbers, as Revised

As a quick reminder, the classic definition of the GDP can be summarized with the following equation :

GDP = private consumption + gross private investment + government spending + (exports - imports)

or, as it is commonly expressed in algebraic shorthand :

GDP = C + I + G + (X-M)

In the new report the values for that equation (total dollars, percentage of the total GDP, and contribution to the final percentage growth number) are as follows :

GDP Components Table Total GDP = C + I + G + (X-M) Annual $ (trillions) $18.2 = $12.5 + $3.0 + $3.2 + $-0.5 % of GDP 100.0% = 68.7% + 16.5% + 17.6% + -2.8% Contribution to GDP Growth % 0.82% = 1.29% + -0.45% + 0.20% + -0.22%

The quarter-to-quarter changes in the contributions that various components make to the overall GDP can be best understood from the table below, which breaks out the component contributions in more detail and over time. In the table below we have split the "C" component into goods and services, split the "I" component into fixed investment and inventories, separated exports from imports, added a line for the BEA's "Real Final Sales of Domestic Product" and listed the quarters in columns with the most current to the left :

Quarterly Changes in % Contributions to GDP 1Q-2016 4Q-2015 3Q-2015 2Q-2015 1Q-2015 4Q-2014 3Q-2014 2Q-2014 1Q-2014 4Q-2013 3Q-2013 2Q-2013 1Q-2013 Total GDP Growth 0.82% 1.38% 1.99% 3.92% 0.64% 2.07% 4.27% 4.56% -0.91% 3.82% 2.98% 1.11% 1.91% Consumer Goods 0.09% 0.36% 1.08% 1.20% 0.25% 0.91% 0.91% 1.49% 0.25% 0.70% 0.60% 0.28% 1.39% Consumer Services 1.20% 1.30% 0.96% 1.23% 0.94% 1.95% 1.42% 1.11% 0.61% 1.66% 0.57% 0.68% 0.36% Fixed Investment -0.25% 0.06% 0.60% 0.83% 0.52% 0.39% 1.23% 0.87% 0.91% 0.79% 0.59% 0.40% 0.77% Inventories -0.20% -0.22% -0.71% 0.02% 0.87% -0.03% -0.01% 1.12% -1.29% -0.08% 1.48% 0.38% 0.28% Government 0.20% 0.02% 0.32% 0.46% -0.01% -0.26% 0.33% 0.21% 0.00% -0.51% -0.42% -0.38% -0.88% Exports -0.25% -0.25% 0.09% 0.64% -0.81% 0.71% 0.24% 1.28% -0.95% 1.42% 0.55% 0.64% 0.12% Imports 0.03% 0.11% -0.35% -0.46% -1.12% -1.60% 0.15% -1.52% -0.44% -0.16% -0.39% -0.89% -0.13% Real Final Sales 1.02% 1.60% 2.70% 3.90% -0.23% 2.10% 4.28% 3.44% 0.38% 3.90% 1.50% 0.73% 1.63%

Summary and Commentary

Once again BEA's report did not show a robust economy. The minor revisions posted in this report were not statistically significant, and the past three quarters continue to show a slow-motion slide towards economic stagnation.

From our perspective the key items in this report are:

-- Private commercial investment remains in contraction.

-- Consumer spending remains weak, repeating a dip very similar to one recorded in the first quarter of 2015 (even though the numbers are reported to be already "seasonally adjusted"). Non-discretionary spending on health care and housing provided most of the growth in consumer services spending.

-- The above spending remained weak even as per capita disposable income improved. All of that increased disposable income was channeled into household savings -- which now stands at 5.7%, the highest level since the fourth quarter of 2012. Clearly households are not so confident that they are freely spending whatever increased pocket money they may have.

Perhaps the hesitance of households to spend is an indication that the first quarter's stagnant economic environment is beginning to collide with a couple of quarters of domestic political "fear, uncertainty and doubt" (FUD). Unfortunately, whatever meager confidence households may have is not likely to improve over the next several quarters of unrelenting media turmoil.
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