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Lee Adler

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Consumer Metrics Institute BEA Leaves 3rd Quarter 2018 GDP Unchanged at 3.50%

28 November 2018 - 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 third quarter of 2018, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +3.50% annual rate, up +0.01% from their previous estimate but still down -0.66% from the prior quarter.

The +0.01% improvement in the headline number masks a troublesome shift in the composition of that growth from consumer spending to even more inventory growth. The headline contribution from consumer spending on goods and services weakened by -0.24% and the growth is now lower than the prior quarter. Offsetting that was an upward revision to inventories (+0.20%), which are now reported to be growing at a +2.27% annualized rate. As a consequence, the BEA's "bottom line" measurement of the economy (the "real final sales of domestic product") was revised downward by -0.19%, now dropping by over four percent (-4.10%) from the prior quarter.

The growth in commercial fixed investment was revised upward +0.29%, while government spending and foreign trade was revised a combined -0.24% downward. Foreign trade is now removing -1.91% from the headline number, off -1.79% from the prior quarter.

Again it is worth noting that the headline number has been propped up by the most fickle of the BEA's data items: inventories; which added +3.44% more to the headline than they did during the prior quarter.

Household disposable income was revised downward by -$86 per annum, and the household savings rate was revised downward to 6.3%, and is now down -0.2% from the prior quarter.

For this revision the BEA assumed an effective annualized deflator of 1.41%. During the same quarter (July 2018 through September 2018) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was somewhat higher at 1.83%. 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 lower at a +3.14% annualized growth rate.

Among the notable items in the report :

-- The headline contribution from consumer expenditures for goods was revised downward -0.20% to +1.00%, down -0.16% from the prior quarter.

-- The contribution to the headline from consumer spending on services was revised downward -0.04% to +1.44%, up +0.03% from last quarter. The combined consumer contribution to the headline number was revised downward -0.24% to +2.45%, down -0.13% from the prior quarter.

-- Commercial private fixed investments was revised upward +0.29%, contributing +0.25 to the headline number. This remains down -0.85% from the prior quarter.

-- Inventories boosted the headline number by +2.27%, up +0.20% from the previous estimate and up +3.44% 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 price or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.

-- The growth in governmental spending was revised downward by -0.12%, and is now contributing +0.44% to the headline number (and up only +0.01% from the prior quarter).

-- The exports crash worsened, and it is now subtracting -0.55% from the headline number, down -0.10% from the previous report and -1.67% from the prior quarter.

-- Imports were largely unchanged in this report, subtracting -1.36% from the headline number (down -0.02% from the previous report and down -1.46% from the prior quarter). In aggregate, foreign trade negatively impacted the headline number by nearly two percent (-1.91%).

-- The "real final sales of domestic product" growth was revised downward by -0.19% to +1.23%, and it is down over four percent (-4.10%) from the prior quarter. This is the BEA's "bottom line" measurement of the economy and it excludes the inventory data.

-- As mentioned above, real per-capita annual disposable income was revised downward -$86, but is still up $169 per annum from a revised prior quarter. The household savings rate was reported to be 6.3% (down -0.4% from the revised prior quarter).



The Numbers

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) $20.7 = $14.1 + $3.7 + $3.6 + $-0.7 % of GDP 100.00% = 68.01% + 17.95% + 17.19% + -3.15% Contribution to GDP Growth % 3.50% = 2.45% + 2.52% + 0.44% + -1.91%

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 3Q-2018 2Q-2018 1Q-2018 4Q-2017 3Q-2017 2Q-2017 1Q-2017 4Q-2016 3Q-2016 2Q-2016 1Q-2016 4Q-2015 3Q-2015 2Q-2015 1Q-2015 Total GDP Growth 3.49% 4.16% 2.22% 2.29% 2.82% 3.00% 1.79% 1.77% 1.92% 2.28% 1.54% 0.41% 0.97% 3.35% 3.32% Consumer Goods 1.20% 1.16% -0.13% 1.42% 0.86% 1.17% 0.40% 0.58% 0.70% 1.01% 0.72% 0.51% 0.91% 1.02% 0.94% Consumer Services 1.49% 1.42% 0.49% 1.22% 0.65% 0.79% 0.82% 1.17% 1.09% 1.29% 0.90% 1.02% 1.00% 1.29% 1.41% Fixed Investment -0.04% 1.10% 1.34% 1.04% 0.44% 0.72% 1.60% 0.28% 0.52% 0.46% 0.31% -0.33% 0.51% 0.63% -0.01% Inventories 2.07% -1.17% 0.27% -0.91% 1.04% 0.23% -0.80% 1.03% -0.59% -0.62% -0.62% -0.70% -0.73% -0.25% 2.16% Government 0.56% 0.43% 0.27% 0.41% -0.18% 0.01% -0.13% 0.03% 0.17% -0.15% 0.60% 0.12% 0.33% 0.70% 0.40% Exports -0.45% 1.12% 0.43% 0.79% 0.42% 0.44% 0.59% -0.44% 0.71% 0.39% -0.31% -0.28% -0.44% 0.48% -0.56% Imports -1.34% 0.10% -0.45% -1.68% -0.41% -0.36% -0.69% -0.88% -0.68% -0.10% -0.06% 0.07% -0.61% -0.49% -1.02% Real Final Sales 1.42% 5.33% 1.95% 3.20% 1.78% 2.77% 2.59 0.74% 2.51% 2.90% 2.16% 1.11% 1.70% 3.60% 1.16%



Summary and Commentary

The key number from this report is the BEA's own "bottom line" for the report, the "real final sales of domestic product," which is now reported to be down more than 4% from the prior quarter. This revision simply reinforced the prior report's story -- that the growth rate for consumer spending was weakening, with inventories growing as a consequence. Global economics and politics also are not helping, with trade now removing another 3% from the headline quarter over quarter.

And it is difficult to get a handle on household incomes and savings, which have been recently revised to the point that it is hard to trust the numbers any more.

In a sense this report was even more of the same, an economy clearly in transition from the happy news reported for 2Q-2018.
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Consumer Metrics Institute BEA Estimates 3rd Quarter 2018 GDP Growth at 3.49%

26 October 2018 - 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 first ("preliminary") estimate of the US GDP for the third quarter of 2018, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +3.49% annual rate, down -0.67% from the prior quarter.

The minor change in the headline number masks significant and worrisome turmoil in the details. In fact, the BEA's "bottom line" measurement of the economy (the "real final sales of domestic product") collapsed, dropping nearly four percent (-3.91%) from the prior quarter.

The red ink relative to the last report is substantial: commercial fixed investment is now contracting (at a -0.04% annualized rate, and down -1.14% from the prior quarter), exports are also now contracting (at a -0.45% rate, down -1.57% from the prior quarter), and imports are now removing -1.34% from the headline number (down -1.44% from the prior quarter).

It could be argued that the headline number has been propped up by the most fickle of the BEA's data items: inventories; which added +3.24% more to the headline than they did during the prior quarter.

In contrast, the consumer sector was steady (with the growth in goods and services spending up +0.11% in total from the prior quarter), as was governmental spending -- adding +0.13% more to the headline than during the prior quarter.

Household disposable income was reported to be up by $180 per annum, and the household savings rate dropped only slightly from the prior quarter to 6.4%.

For this revision the BEA assumed an effective annualized deflator of 1.39%. During the same quarter (July 2018 through September 2018) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was somewhat higher at 1.83%. 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 lower at a +3.11% annualized growth rate.

Among the notable items in the report :

-- The headline contribution from consumer expenditures for goods was +1.20%, up +0.04% from the prior quarter.

-- The contribution to the headline from consumer spending on services was +1.49%, up +0.07% from last quarter. The combined consumer contribution to the headline number was +2.69%.

-- Commercial private fixed investments contracted, subtracting -0.04% from the headline number. This was down -1.14% from the prior quarter.

-- Inventories boosted the headline number by +2.01%, up +3.24% 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 price or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.

-- The growth in governmental spending was up, adding +0.56% to the headline number (and up +0.13% from the prior quarter).

-- Exports crashed, subtracting -0.45% from the headline number, down -1.57% from the prior quarter.

-- Imports returned to normal form, subtracting -1.34% from the headline number (down -1.44% from the prior quarter). In aggregate, foreign trade impacted the headline number by -1.79%.

-- The "real final sales of domestic product" growth dropped -3.91% to +1.42%. This is the BEA's "bottom line" measurement of the economy and it excludes the inventory data.

-- As mentioned above, real per-capita annual disposable was reported to have grown $180 per annum from the prior quarter. The household savings rate was reported to be 6.4% (down -0.4% from the prior quarter).



The Numbers

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) $20.7 = $14.1 + $3.7 + $3.6 + $-0.6 % of GDP 100.00% = 68.09% + 17.84% + 17.19% + -3.13% Contribution to GDP Growth % 3.49% = 2.69% + 2.03% + 0.56% + -1.79%

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 3Q-2018 2Q-2018 1Q-2018 4Q-2017 3Q-2017 2Q-2017 1Q-2017 4Q-2016 3Q-2016 2Q-2016 1Q-2016 4Q-2015 3Q-2015 2Q-2015 1Q-2015 Total GDP Growth 3.49% 4.16% 2.22% 2.29% 2.82% 3.00% 1.79% 1.77% 1.92% 2.28% 1.54% 0.41% 0.97% 3.35% 3.32% Consumer Goods 1.20% 1.16% -0.13% 1.42% 0.86% 1.17% 0.40% 0.58% 0.70% 1.01% 0.72% 0.51% 0.91% 1.02% 0.94% Consumer Services 1.49% 1.42% 0.49% 1.22% 0.65% 0.79% 0.82% 1.17% 1.09% 1.29% 0.90% 1.02% 1.00% 1.29% 1.41% Fixed Investment -0.04% 1.10% 1.34% 1.04% 0.44% 0.72% 1.60% 0.28% 0.52% 0.46% 0.31% -0.33% 0.51% 0.63% -0.01% Inventories 2.07% -1.17% 0.27% -0.91% 1.04% 0.23% -0.80% 1.03% -0.59% -0.62% -0.62% -0.70% -0.73% -0.25% 2.16% Government 0.56% 0.43% 0.27% 0.41% -0.18% 0.01% -0.13% 0.03% 0.17% -0.15% 0.60% 0.12% 0.33% 0.70% 0.40% Exports -0.45% 1.12% 0.43% 0.79% 0.42% 0.44% 0.59% -0.44% 0.71% 0.39% -0.31% -0.28% -0.44% 0.48% -0.56% Imports -1.34% 0.10% -0.45% -1.68% -0.41% -0.36% -0.69% -0.88% -0.68% -0.10% -0.06% 0.07% -0.61% -0.49% -1.02% Real Final Sales 1.42% 5.33% 1.95% 3.20% 1.78% 2.77% 2.59 0.74% 2.51% 2.90% 2.16% 1.11% 1.70% 3.60% 1.16%



Summary and Commentary

After last quarter's happy news, this report is somewhat sobering. The headline still looks good, but a wild swing in inventories has masked material deterioration in private fixed investments (in both commercial and residential construction) and foreign trade.

Households, on the other hand, seem to be doing better -- as evidenced by steady consumer spending on both goods and services.

This report is very different from the good news and solid numbers reported for the second quarter of 2018. 3Q-2018 certainly looks more like an economy in transition than what was reported for 2Q-2018. And we are always a little nervous when inventory growth is providing more than half of the headline number.
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Consumer Metrics Institute BEA Leaves 2nd Quarter 2018 GDP Growth Essentially Unchanged...

27 September 2018 - 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 third (and final) estimate of the US GDP for the second quarter of 2018, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +4.16% annual rate, down an inconsequential -0.07% from their previous estimate and but still up +1.94% from the prior quarter.

None of the reported revisions were material. The growth rate for consumer spending for goods was revised upward by +0.04%, and there was a -0.01% decline in the growth rate of consumer spending on services. The contraction rate for inventories worsened (-0.20%) to -1.17%, while the growth rate in commercial fixed investment rose by +0.03% to +1.10%. The growth rate for imports improved to +0.10%.

Household disposable income was revised downward by $1 per annum, and the household savings rate was unchanged from the previous report at 6.8%.

For this revision the BEA assumed an effective annualized deflator of 3.31%. During the same quarter (April 2018 through June 2018) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was significantly lower at 2.26%. Over estimating inflation results in pessimistic growth rates, and if the BEA's "nominal" data was deflated using CPI-U inflation information the headline growth number would have been much higher at a +5.36% annualized growth rate.

Among the notable items in the report :

-- The headline contribution from consumer expenditures for goods was revised upward +0.04% to +1.16% (up +1.29% from the prior quarter).

-- The contribution to the headline from consumer spending on services dropped -0.01% to +1.42%. The combined consumer contribution to the headline number was +2.58%, up over 2% (+2.22%) from 1Q-2018.

-- The headline contribution from commercial private fixed investments was +1.10%, down -0.24% from the prior quarter.

-- Inventories subtracted -1.17% from the headline number. It is important to remember that the BEA's inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity price or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.

-- The growth in governmental spending was up slightly, adding +0.43% to the headline number (and up +0.16% from the prior quarter).

-- Exports contributed +1.12% to the headline number, up +0.69% from the prior quarter.

-- In a continuation of inverted form, imports added +0.10% to the headline number, up +0.55% from the prior quarter. In aggregate, foreign trade boosted the headline number by +1.22%.

-- The "real final sales of domestic product" growth was revised upward to +5.33%, up a dramatic +3.38% from the prior quarter. This is the BEA's "bottom line" measurement of the economy and it excludes the inventory data.

-- As mentioned above, real per-capita annual disposable was down $1 per year from the previous report. The household savings rate was reported to be unchanged at 6.8%.



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) $20.4 = $13.9 + $3.6 + $3.5 + $-0.5 % of GDP 100.00% = 67.98% + 17.54% + 17.18% + -2.69% Contribution to GDP Growth % 4.16% = 2.58% + -0.07% + 0.43% + 1.22%

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 2Q-2018 1Q-2018 4Q-2017 3Q-2017 2Q-2017 1Q-2017 4Q-2016 3Q-2016 2Q-2016 1Q-2016 4Q-2015 3Q-2015 2Q-2015 1Q-2015 Total GDP Growth 4.16% 2.22% 2.29% 2.82% 3.00% 1.79% 1.77% 1.92% 2.28% 1.54% 0.41% 0.97% 3.35% 3.32% Consumer Goods 1.16% -0.13% 1.42% 0.86% 1.17% 0.40% 0.58% 0.70% 1.01% 0.72% 0.51% 0.91% 1.02% 0.94% Consumer Services 1.42% 0.49% 1.22% 0.65% 0.79% 0.82% 1.17% 1.09% 1.29% 0.90% 1.02% 1.00% 1.29% 1.41% Fixed Investment 1.10% 1.34% 1.04% 0.44% 0.72% 1.60% 0.28% 0.52% 0.46% 0.31% -0.33% 0.51% 0.63% -0.01% Inventories -1.17% 0.27% -0.91% 1.04% 0.23% -0.80% 1.03% -0.59% -0.62% -0.62% -0.70% -0.73% -0.25% 2.16% Government 0.43% 0.27% 0.41% -0.18% 0.01% -0.13% 0.03% 0.17% -0.15% 0.60% 0.12% 0.33% 0.70% 0.40% Exports 1.12% 0.43% 0.79% 0.42% 0.44% 0.59% -0.44% 0.71% 0.39% -0.31% -0.28% -0.44% 0.48% -0.56% Imports 0.10% -0.45% -1.68% -0.41% -0.36% -0.69% -0.88% -0.68% -0.10% -0.06% 0.07% -0.61% -0.49% -1.02% Real Final Sales 5.33% 1.95% 3.20% 1.78% 2.77% 2.59 0.74% 2.51% 2.90% 2.16% 1.11% 1.70% 3.60% 1.16%



Summary and Commentary

All of the revisions in this report can be characterized as statistical noise. Nonetheless, a headline number with +4.16% growth is very good, confirming that the stimulus expected from the "Tax Cuts and Jobs Act of 2017" has materialized. And the BEA's own "bottom line" Real Final Sales growth was reported to be +5.33%.

As we have mentioned before, this kind of growth signals that the Fed's accommodations over the past decade are certainly no longer needed. And if the growth persists in this range for another quarter or two, significant tightening might be warranted to prevent the economy (and wage-price inflation) from overheating.
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Consumer Metrics Institute BEA Revises 2nd Quarter 2018 GDP Growth Upward to 4.23%

29 August 2018 - 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 second quarter of 2018, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +4.23% annual rate, up +0.16% from their previous estimate and up +2.01% from the prior quarter.

None of the reported revisions were material. The growth rate for consumer spending for services was revised lower by -0.12%, and there was a -0.03% decline in the growth rate of consumer spending on goods. The contraction rate for inventories moderated slightly (+0.03%) to -0.97%, while the growth rate in commercial fixed investment rose by +0.13% to +1.07%. The growth rate for imports improved +0.13%.

Household disposable income was revised lower by $9 per annum, and the household savings rate was unchanged from the previous report at 6.8% (although that previous report contained extensive and significant upward revisions to historic savings rates).

For this revision the BEA assumed an effective annualized deflator of 3.24%. During the same quarter (April 2018 through June 2018) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was significantly lower at 2.26%. Over estimating inflation results in pessimistic growth rates, and if the BEA's "nominal" data was deflated using CPI-U inflation information the headline growth number would have been much higher at a +5.36% annualized growth rate.

Among the notable items in the report :

-- The headline contribution from consumer expenditures for goods was revised downward -0.12% to +1.12% (but still up +1.25% from the prior quarter).

-- The contribution to the headline from consumer spending on services dropped -0.03% to +1.43%. The combined consumer contribution to the headline number was +2.55%, up over 2% (+2.19%) from 1Q-2018.

-- The headline contribution from commercial private fixed investments was +1.07%, down -0.27% from the prior quarter.

-- Inventories subtracted -0.97% from the headline number. It is important to remember that the BEA's inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity price or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.

-- The growth in governmental spending was up slightly, adding +0.41% to the headline number (and up +0.14% from the prior quarter).

-- Exports contributed +1.10% to the headline number, up +0.67% from the prior quarter.

-- Contrary to normal form, imports added +0.07% to the headline number, up +0.52% from the prior quarter. In aggregate, foreign trade boosted the headline number by +1.17%.

-- The "real final sales of domestic product" growth was revised upward to +5.20%, up a dramatic +3.25% from the prior quarter. This is the BEA's "bottom line" measurement of the economy and it excludes the inventory data.

-- As mentioned above, real per-capita annual disposable was down $9 per year from the previous report. The household savings rate was reported to be unchanged at 6.8%.



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) $20.4 = $13.9 + $3.6 + $3.5 + $-0.6 % of GDP 100.00% = 67.96% + 17.57% + 17.17% + -2.70% Contribution to GDP Growth % 4.23% = 2.55% + 0.10% + 0.41% + 1.17%

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 2Q-2018 1Q-2018 4Q-2017 3Q-2017 2Q-2017 1Q-2017 4Q-2016 3Q-2016 2Q-2016 1Q-2016 4Q-2015 3Q-2015 2Q-2015 1Q-2015 Total GDP Growth 4.23% 2.22% 2.29% 2.82% 3.00% 1.79% 1.77% 1.92% 2.28% 1.54% 0.41% 0.97% 3.35% 3.32% Consumer Goods 1.12% -0.13% 1.42% 0.86% 1.17% 0.40% 0.58% 0.70% 1.01% 0.72% 0.51% 0.91% 1.02% 0.94% Consumer Services 1.43% 0.49% 1.22% 0.65% 0.79% 0.82% 1.17% 1.09% 1.29% 0.90% 1.02% 1.00% 1.29% 1.41% Fixed Investment 1.07% 1.34% 1.04% 0.44% 0.72% 1.60% 0.28% 0.52% 0.46% 0.31% -0.33% 0.51% 0.63% -0.01% Inventories -0.97% 0.27% -0.91% 1.04% 0.23% -0.80% 1.03% -0.59% -0.62% -0.62% -0.70% -0.73% -0.25% 2.16% Government 0.41% 0.27% 0.41% -0.18% 0.01% -0.13% 0.03% 0.17% -0.15% 0.60% 0.12% 0.33% 0.70% 0.40% Exports 1.10% 0.43% 0.79% 0.42% 0.44% 0.59% -0.44% 0.71% 0.39% -0.31% -0.28% -0.44% 0.48% -0.56% Imports 0.07% -0.45% -1.68% -0.41% -0.36% -0.69% -0.88% -0.68% -0.10% -0.06% 0.07% -0.61% -0.49% -1.02% Real Final Sales 5.20% 1.95% 3.20% 1.78% 2.77% 2.59 0.74% 2.51% 2.90% 2.16% 1.11% 1.70% 3.60% 1.16%



Summary and Commentary

Although the revisions in this report can be characterized as statistical noise, a headline number with +4.23% growth is outstanding under any circumstance. The stimulus expected from the "Tax Cuts and Jobs Act of 2017" seems to be materializing. And the BEA's own "bottom line" Real Final Sales growth was reported to be +5.20% -- a number that some might consider to be unsustainably high or an early indication of an overheating economy.

As we have mentioned before, this kind of growth signals that the Fed's accommodations over the past decade are certainly no longer needed. And if the growth persists in this range for another quarter or two, significant tightening might be in order.
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Consumer Metrics Institute BEA Estimates 2nd Quarter 2018 GDP Growth at 4.07%

27 July 2018 - 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 first ("Advance") estimate of the US GDP for the second quarter of 2018, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +4.07% annual rate, up a significant +1.85% from a revised prior quarter.

In this report the BEA also performed their annual revisions to previous quarters, this time dating back to 1929. The average quarterly revision to the headline number for the past four quarters was downward and material at -0.19%, while the average quarterly revision for the headline over the period dating back to the beginning of 2008 was much smaller at -0.03%.

That small average revision masks the nature and volatility of the revisions. The standard deviation of the headline number's revisions dating back to 2008 was 0.46%, indicating that although over the long term the growth measurements were generally accurate, significant portions of that growth were initially misallocated at a quarterly level. The bulk of the revisions consisted of moving material amounts of the growth from one quarter to another.

During the second quarter of 2018 the growth rate for total consumer spending was reported to be +2.70%, up +2.34% from the revised prior quarter. Inventories contracted by -1.00%, while the growth rate in commercial fixed investment rose by a nearly offsetting +0.94%. Exports strengthened by +1.12% while imports weakened -- subtracting only -0.06% from the headline number.

Previously reported household income data was also extensively revised. Real annualized household disposable income increased by $205 per annum (in 2012 dollars), and the household savings rate was revised sharply upward to 6.8%.

For this revision the BEA assumed an effective annualized deflator of 3.21%. During the same quarter (April 2018 through June 2018) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was significantly lower at 2.26%. Over estimating inflation results in pessimistic growth rates, and if the BEA's "nominal" data was deflated using CPI-U inflation information the headline growth number would have been much higher at a +5.16% annualized growth rate.

Among the notable items in the report :

-- Consumer expenditures for goods grew at a +1.24% annualized rate (up +1.37% from a revised prior quarter).

-- The contribution to the headline from consumer spending on services increased +0.97% to +1.46%. The combined consumer contribution to the headline number was +2.70%, up +2.34% from a revised 1Q-2018.

-- The headline contribution from commercial private fixed investments was +0.94%, down -0.40% from the prior quarter.

-- Inventories subtracted -1.00% from the headline number. It is important to remember that the BEA's inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity price or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.

-- The growth in governmental spending added +0.37% to the headline number, up +0.10% from a revised prior quarter.

-- Exports contributed +1.12% to the headline number, up +0.69% from the prior quarter.

-- Imports subtracted only -0.06% from the headline number, up +0.39% from the prior quarter. In aggregate, foreign trade added +1.06% to the headline number.

-- The "real final sales of domestic product" growth was a very healthy +5.07%, up a substantial +3.12% from a revised prior quarter. This is the BEA's "bottom line" measurement of the economy and it excludes the inventory data.

-- As mentioned above, real per-capita annual disposable was reported to have grown $205 quarter-to-quarter in this report. The household savings rate was reported to be 6.8%. Nearly all of the personal income numbers were revised (including the quarter-by-quarter household savings rates, which were nearly doubled in revision over the past two years), and the reporting was shifted from chained 2009 dollars to 2012 dollars.



The Numbers, Nearly All 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) $20.4 = $13.9 + $3.6 + $3.5 + $-0.6 % of GDP 100.00% = 68.02% + 17.53% + 17.16% + -2.71% Contribution to GDP Growth % 4.07% = 2.70% + -0.06% + 0.37% + 1.06%

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 2Q-2018 1Q-2018 4Q-2017 3Q-2017 2Q-2017 1Q-2017 4Q-2016 3Q-2016 2Q-2016 1Q-2016 4Q-2015 3Q-2015 2Q-2015 1Q-2015 Total GDP Growth 4.07% 2.22% 2.29% 2.82% 3.00% 1.79% 1.77% 1.92% 2.28% 1.54% 0.41% 0.97% 3.35% 3.32% Consumer Goods 1.24% -0.13% 1.42% 0.86% 1.17% 0.40% 0.58% 0.70% 1.01% 0.72% 0.51% 0.91% 1.02% 0.94% Consumer Services 1.46% 0.49% 1.22% 0.65% 0.79% 0.82% 1.17% 1.09% 1.29% 0.90% 1.02% 1.00% 1.29% 1.41% Fixed Investment 0.94% 1.34% 1.04% 0.44% 0.72% 1.60% 0.28% 0.52% 0.46% 0.31% -0.33% 0.51% 0.63% -0.01% Inventories -1.00% 0.27% -0.91% 1.04% 0.23% -0.80% 1.03% -0.59% -0.62% -0.62% -0.70% -0.73% -0.25% 2.16% Government 0.37% 0.27% 0.41% -0.18% 0.01% -0.13% 0.03% 0.17% -0.15% 0.60% 0.12% 0.33% 0.70% 0.40% Exports 1.12% 0.43% 0.79% 0.42% 0.44% 0.59% -0.44% 0.71% 0.39% -0.31% -0.28% -0.44% 0.48% -0.56% Imports -0.06% -0.45% -1.68% -0.41% -0.36% -0.69% -0.88% -0.68% -0.10% -0.06% 0.07% -0.61% -0.49% -1.02% Real Final Sales 5.07% 1.95% 3.20% 1.78% 2.77% 2.59 0.74% 2.51% 2.90% 2.16% 1.11% 1.70% 3.60% 1.16%



Summary and Commentary

A headline number showing +4.07% growth makes us want to break into a boisterous refrain of "Happy Days are Here Again." Some will undoubtedly claim that the "Tax Cuts and Jobs Act of 2017" is making America great again. And the BEA's own "bottom line" Real Final Sales growth was reported to be +5.07% -- a number that some might consider to be unsustainably high or an early indication of an overheating economy. At minimum it signals that the Fed's accommodations over the past decade are no longer needed.

One cautionary point should be made for the data geeks: in a number of cases (particularly household savings rates) the revisions were substantial enough that they materially changed our understanding of how the historical economy was behaving. As a glaring example, the household savings rates since 2012 were substantially increased -- including an essential doubling of the savings rates for the prior four quarters. These kind of revisions suggest major methodology changes that can make historical comparisons problematic.

While we are pleased to find the economy growing far faster than we had previously expected, the historical revisions leave us with a sense of unease.
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