Inventory-Building Masks Stagnant 3rd Quarter GDP

October 30, 2010

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

The Bureau of Economic Analysis released its first preliminary estimate of U.S. Gross Domestic Product (GDP) on Friday morning.  (Link provided above.)  GDP grew by 2.0%, a marginal improvement over the 2nd quarter final reading of 1.7%.  Inventory-building added 1.44% to GDP.  That’s not good.  Inventories can’t grow indefinitely and, at some point, are corrected with inventory reductions.  Strip out inventory-building and GDP rose by only 0.56% – less than the rate of population growth.

Before going further, I should point out that all of these numbers are dependent on the government’s estimate of inflation, or what they call the GDP “deflator.”  GDP actually rose at an annual rate of 4.2%, but the government estimates the GDP deflator to be 2.2%.  Thus, “real” (adjusted for inflation) GDP rose at an annual rate of only 2.0%.  What if the government underestimated inflation and its effect on the cost of living?  The numbers would show “economic growth” but everyone would be getting poorer.  I point this out just to illustrate how questionable these numbers can be.

With that said, factoring in population growth of about 1% per year, real per capita GDP rose at an annual rate of about 1%, little changed from the 2nd quarter.  With stimulus spending factored out, it actually rose at much more robust pace of 4.5%.  But that’s a technicality, caused by a huge downward swing in stimulus spending from the previous quarter.  As you can see from the following chart, real per capita GDP with stimulus spending factored out has been bouncing up and down (likely due to lags in reporting on stimulus spending), but shows no upward trend.  In other words, the stimulus spending halted a cataclysmic decline in GDP and stabilized it, but there’s no evidence of growth.  And the stimulus spending will soon be coming to an end. 

Real Per Capita GDP

This is why the Fed is so worried about prospects for the economy and is widely expected to start pumping billions more into the economy.  More on that in the next post.


4th Quarter Real Per Capita GDP Jumps 4.6% (Sort of)

January 30, 2010

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

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:

Per Capita GDP

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:

http://www.reuters.com/article/idUSTRE60S3AZ20100129

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.


Real Per Capita GDP Falls 1.5%, Recession Now One Year Old

November 26, 2008
Yesterday, November 25, the Bureau of Economic Analysis announced that real GDP* in the 3rd quarter fell at an annual rate of 0.5%, worse than its preliminary estimate of a decline of 0.3%.  But GDP is a meaningless figure if it’s not related to the size of our population. Since the U.S. population is steadily rising at an annual rate of about 1%, then the GDP pie has to be sliced into more pieces. If the pie isn’t growing faster than the population, then everyone gets a smaller piece. In other words, the effect on individual Americans is even more pronounced than raw GDP data would lead us to believe. In the 3rd quarter of 2008, real per capita GDP fell by 1.5% to $38,412 per person (adjusted for inflation and expressed in 2000 dollars). That’s a decline three times as bad as the government’s raw GDP data.

This is the third quarterly decline in real per capita GDP in the last four quarters. Only the second quarter of 2008 had a small gain of 1.8%, thanks to the fiscal stimulus package. Real per capita GDP is actually lower than it was in the 3rd quarter of 2007. And all experts agree that the 4th quarter of 2008 will be much worse.  Since real per capita GDP is a much better gauge of how the economy impacts individual Americans, I use this for my definition of a “recession.”  By this definition, America has now endured a full year of recession, and it promises to get much worse.

The trade deficit continues to be a huge drag on real per capita GDP. Were it not for the trade deficit, 3rd quarter real per capita GDP would have been 6.0% greater at $40,733 per person. (Imports are a subtraction from GDP in the BEA’s calculation.) If the next president is looking for a way to turn the economy around, the trade deficit would be a great place to start.

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* – Annualized 3rd Quarter Actual GDP, expressed in current dollars, was $14.420 trillion, compared to $14.295 trillion in the 2nd quarter.  However, “real” GDP, which is adjusted for inflation and expressed in 2000 dollars, was $11.712 trillion, compared to $11.727 trillion in the 2nd quarter.


Real Per Capita GDP Falls 1.2%

October 31, 2008
The Bureau of Economic Analysis reported Thursday that 3rd quarter real GDP* fell at an annual rate of 0.3%. But GDP is a meaningless figure if it’s not related to the size of our population. Since the U.S. population is steadily rising at an annual rate of about 1%, then the GDP pie has to be sliced into more pieces. If the pie isn’t growing faster than the population, then everyone gets a smaller piece. In other words, the effect on individual Americans is even more pronounced than raw GDP data would lead us to believe. In the 3rd quarter of 2008, real per capita GDP fell by 1.2% to $38,438 per person (adjusted for inflation and expressed in 2000 dollars). That’s a decline four times as bad as the government’s raw GDP data.

This is the third quarterly decline in real per capita GDP in the last four quarters. Only the second quarter of 2008 had a small gain of 1.8%, thanks to the fiscal stimulus package. Real per capita GDP is actually lower than it was in the 3rd quarter of 2007. And all experts agree that the 4th quarter of 2008 will be even worse.

The trade deficit continues to be a huge drag on real per capita GDP. Were it not for the trade deficit, 3rd quarter real per capita GDP would have been 6.0% greater at $40,733 per person. (Imports are a subtraction from GDP in the BEA’s calculation.) If the next president is looking for a way to turn the economy around, the trade deficit would be a great place to start.

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* – Annualized 3rd Quarter Actual GDP, expressed in current dollars, was $14.429 trillion, compared to $14.295 trillion in the 2nd quarter.  However, “real” GDP, which is adjusted for inflation and expressed in 2000 dollars, was $11.720 trillion, compared to $11.727 trillion in the 2nd quarter.