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Review 1st Qtr 2013 GDP: The “Final” Answer

Posted by Larry Doyle on April 26, 2013 8:34 AM |

The 1st quarter 2013 GDP release indicating growth of 2.5% might not be as strong as expected but it is certainly a lot better than the anemic .4% increase registered in Q4/2012, right?

On the surface, yes, you would be correct. 2.5 is definitely a larger number than .4.

If we were to go by such simple measures, then we can paint a whole host of beautiful landscapes as we navigate our way deeper into the depths of economic hell. Let’s not be so easily hoodwinked, but sort through the noise in this report to reveal what I believe is the critical component of any GDP report. And what is that?

Real final sales.

How are we doing on that front? Sifting through the inventory adjustments and assorted other noise in the Bureau of Economic Analysis report, we find tucked way down the bottom of the report the fact that:

Real final sales of domestic product — GDP less change in private inventories — increased 1.5 percent in the first quarter, compared with an increase of 1.9 percent in the fourth.

Pardon the verbiage, but that number and that trend “sucks.”

Navigate accordingly.

Larry Doyle

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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    In their first estimate of the US GDP for the first quarter of 2013, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a 2.50% annualized rate, some 2.12% better than the 0.38% growth rate for the prior quarter.

    Although the headline number itself indicates moderate mid-cycle growth, the details within the BEA’s report cast at best a mixed message for the overall health of the economy. For example: although the overall contribution from consumer spending was up, it came mainly from spending on services (boosting the headline number by 1.46%, and principally spent on non-discretionary rents and utilities), with consumer spending for goods contributing to the headline number at a more modest 0.78% (down about -0.24% from the prior quarter). And although fixed investments were still contributing a positive 0.53% to the headline number, that was down over a full percent from the prior quarter. In fact, inventories swinging back to growth (after contracting during the prior quarter) arguably provided all of the quarter-to-quarter improvement in the headline growth rate.

    For this set of revisions the BEA assumed annualized net aggregate inflation of 1.20%. In contrast, during the first quarter the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) recorded a 2.10% annualized inflation rate. As a reminder: an understatement of assumed inflation increases the reported headline number — and in this case the BEA’s relatively low “deflater” (nearly a full percent below the CPI-U) boosted the published headline rate. If the CPI-U had been used to convert the “nominal” GDP numbers into “real” numbers, the reported headline growth rate would have been a much more modest 1.63%.

    Finally, one of the bright spots in the prior quarter’s data (the previously reported substantial improvements in real per capita disposable income) completely reversed in this report — confirming that the fourth quarter’s upward surge in real per capita disposable income was merely an artifact of payroll “gaming” in anticipation of increasing tax rates. In fact, real per capita disposable income contracted during the quarter at an astonishing -5.88% annualized rate — crashing back to levels that are below where they were two years ago. And, as expected, consumers offset the “new” FICA rate increase of 2% by reducing their savings rate by -2.1%. Although this arguably propped up consumer spending during the quarter, it is important to note that that spending support came in spite of a sharp contraction in sustainable household incomes.

    Among the notable items in the report:

    — The contribution of consumer expenditures for goods to the headline number weakened to 0.78% (down from 1.02% in the fourth quarter of 2012).

    — The contribution made by consumer services soared to 1.46% (up 1.19% from the previous quarter). As noted above this increase came from higher spending for non-discretionary rents and utilities.

    — The growth rate contribution from private fixed investments dropped sharply to 0.53% (from 1.69% in the previous quarter).

    — Inventories grew, raising the headline number by 1.03% (reversing their drag on the previous quarter’s headline of -1.52%).

    — The previous quarter’s sharp contraction in government spending moderated somewhat, and it is now removing -0.80% from the headline number (an improvement of 0.61% from the -1.41% drag reported for the prior quarter — and almost all of that “improvement” came from Federal defense spending).

    — Improving exports added 0.40% to the headline number (perfectly reversing the -0.40% drag reported for fourth quarter of 2012).

    — But that good news was more than completely offset by a significant drop in the contribution from imports — which removed -0.90% from the headline number after adding +0.73% in the prior quarter. Since this drag on the headline number can come from increasing domestic demand for foreign goods it is often spun as a sign of a strengthening economy, although it can often be merely a sign of rising commodity prices.

    — The annualized growth rate of “real final sales of domestic product” dropped to 1.47% (from 1.90% in the prior quarter). This is the BEA’s “bottom line” measurement of the economy, and the -0.43% erosion in that growth rate is a consequence of the surging inventories.

    — And real per-capita disposable income took a monumental hit: it dropped by an annualized $498 from quarter to quarter, while personal savings plunged to 2.6% (dropping 2.1% from the 4.7% recorded in the prior quarter). Real per-capita disposable income is now down $123 annually from 1Q-2011 — a full two years ago.

    April 26, 2013 – BEA Estimates 1st Quarter 2013 GDP Growing at 2.5% Annual Rate:






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