On Friday the Bureau of Economic Analysis (BEA) announced that real (adjusted for inflation) U.S. GDP (gross domestic product) grew in the fourth quarter by 1.425%, which yields an annualized rate of growth of 5.7%. Allowing for an annualized population growth rate of 1.0%, that means the real per capita GDP grew at an annualized rate of 4.6%, rising to $42,638 from $42,153 in the 3rd quarter.
If we factor stimulus spending out of the equation to determine what’s happening with the real, underlying economy, the growth rate is even higher – an annualized rate of 8.6% – thanks to the fact that stimulus spending actually fell in the 4th quarter to $83.8 billion from $113.2 billion in the 3rd quarter.
Wow! The economy’s really on a roll, right? Well, maybe not. When you examine the details, things don’t look quite so rosy. I’ve provided a link above to the BEA report. Here’s what accounted for the lion’s share of the growth:
The change in real private inventories added 3.39 percentage points to the fourth-quarter change
in real GDP after adding 0.69 percentage point to the third-quarter change. Private businesses decreased
inventories $33.5 billion in the fourth quarter, following decreases of $139.2 billion in the third quarter
and $160.2 billion in the second.
In other words, in the bizzaro world of government macroeconomy accounting, when inventories decline less than they did in the previous quarter, this actually counts as economic growth! So of the 5.7% gain in GDP, 3.39% or 59% of the gain is purely an accounting gimmick – smoke and mirrors.
And it doesn’t stop there. Since trade data for the month of December hasn’t even come in yet, this first-pass estimate of 4th quarter GDP is based upon assumptions about exports and imports.
Real exports of goods and services increased 18.1 percent in the fourth quarter, compared with
an increase of 17.8 percent in the third. Real imports of goods and services increased 10.5 percent,
compared with an increase of 21.3 percent.
I don’t know where they’re getting these figures, but the trade data published by the BEA (see http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf) simply doesn’t bear these out. So far, in the 4th quarter, exports have risen only about 5% from the 3rd quarter and remain below the level of exports in the 4th quarter of 2008. The story for imports is exactly the same – a rise of about 5% vs. the 3rd quarter. So the claim of a big rise in exports and a much smaller rise in imports simply doesn’t hold water. Assumptions about trade made in the 1st-pass estimate of 3rd quarter GDP were also inflated, resulting in the final reading of 3rd quarter GDP being cut to 2.2% from the initial 3.8% estimate.
The following graph depicts real per capita GDP, with and without stimulus spending, since the first quarter of 2000:
The sharp V-turn in the last quarter, especially with stimulus spending removed, just doesn’t look very plausible, does it? I’ll update this data when the next estimate of 4th quarter GDP comes out next month. The revisions never generate nearly the interest as the first-pass estimate, so it won’t surprise me if we learn that this estimate was goosed with some false assumptions to prop up consumer and investor confidence.
By the way, I’m not the only one who sees a red herring in this report. Check out some of the quotes from this article below:
NIGEL GAULT, CHIEF U.S. ECONOMIST, IHS GLOBAL INSIGHT, LEXINGTON, MASSACHUSETTS:
“We got to be very cautious about what it implies for the future because it (came) from the inventory cycle… if you take out net exports as well, the actual final spending by U.S. consumers, businesses and government actually grew more slowing in the fourth quarter than the third quarter.
“I’m a bit doubtful that net exports can continue to be a plus because I think we’re going to see a rebound in imports. Also, there’s not a lot more, in terms of the growth effect, to come from inventories.
CARL LANTZ, U.S. INTEREST RATE STRATEGIST, CREDIT SUISSE, NEW YORK:
“A big inventory build added about 3.4 percent and then a swing in net exports added another half of a percent. When you look at domestic demand, final sales to domestic purchasers, it was only 1.7.
TOM PORCELLI, SENIOR ECONOMIST, RBC CAPITAL MARKETS, NEW YORK:
“When you strip out inventories, you see real final sales were 2.2 percent. This is not a fantastic number. If you compare this to the ’75 and ’82 recessions, real final sales in the first two quarters after, we averaged 5 percent after ’82 recession, and about 4 percent after the ’75. By comparison, we obviously are looking pretty weak.