By Rick Davis, Consumer Metrics Institute
Editor’s note: Note that despite the scepticism here about the GDP deflator, we should point out that GDP deflators are numbers used to deflate domestic product only and are not a substitute for domestic price inflation. The deflator cannot take import prices into account. To the degree import prices rise, these are reflected by adding to the import aggregate, subtracting from GDP growth.
In their "advanced" estimate of the first quarter 2012 GDP, the Bureau of Economic Analysis (BEA) found that the annualized rate of U.S. domestic economic growth was 2.20%, down more than three-quarters of a percent from the fourth quarter of 2011. The vast bulk of the downturn was in commercial activities, with both fixed investments and inventories lowering the headline number substantially. Consumer spending on both goods and services improved slightly, and the ongoing contraction in governmental spending moderated somewhat. The BEA’s bottom-line "real final sales" improved about a half-percent to an annualized growth rate of 1.61% — hardly robust and certainly not the kind of numbers we would expect to see nearly three years into a recovery.
Once again the BEA has used "deflaters" that will strain the credibility of the public, especially if they buy gasoline. To correct the "nominal" data into "real" numbers the BEA assumed that the annualized inflation rate during 1Q-2012 was 1.54%. As a reminder, lower "deflaters" cause the reported "real" growth rates to increase — and once again very low seasonally adjusted BEA inflation "deflaters" have been the headline number’s best friend. If the raw "nominal" numbers were instead "deflated" by using the seasonally corrected CPI-U calculated by the Bureau of Labor Statistics (BLS) for the same time period, nearly the entire headline growth rate vanishes — and the resulting growth rate would have been a minuscule 0.08% with "real final sales" contracting.
And real per capita disposable income actually shrank during the quarter — even using the BEA’s optimistic "deflaters." Real-world households likely felt the pinch even more.
Among the notable items in the report:
— The contribution to the annualized growth rate for consumer expenditures for goods improved to 1.47%, up 0.18% from the 1.29% for the fourth quarter of 2011. Although this number remains modest by "recovery" standards, it has been trending upward for the past several quarters.
— The contribution made by consumer services also improved (to 0.57%), but it also remains anemic by "recovery" standards.
— The growth rate contribution from private fixed investments dropped to 0.18% — losing over a half-percent relative to the fourth quarter of 2011 and 1.34% from the third quarter of 2011.
— The contribution from inventories (0.59% annualized) dropped significantly from the 1.81% reported for 4Q-2011. This drop in inventory building was inevitable, although it still represents nearly a quarter of the headline number.
— The reported drag on GDP growth from contracting expenditures by governments moderated somewhat at -0.60% (about a quarter of a percent less than the -0.84% reported for 4Q2011).
— The annualized contribution to the growth rate from exports rose to 0.73% (from 0.37% in the prior quarter).
— Imports are now removing -0.74% from the growth rate of the overall economy, slightly worse than the -0.63% recorded during 4Q2011.
— The annualized growth rate of "real final sales of domestic product" rose to 1.61%, but it is still a 1.55% below the +3.16% reported for the third quarter of 2011. If this number is accepted at face value (and not as a consequence of "deflaters" playing havoc with inventory valuations) it still indicates a much weaker economy than is conveyed in the headline number.
— Real per-capita disposable income shrank at an annualized -0.27% rate during the quarter (from $32,699 per capita to $32,677 per capita) — and it remains lower than it was 5 quarters ago.
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:
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 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 Finals Sales of Domestic Product" and listed the quarters in columns with the most current to the left:
As lackluster as it may be, the headline number of 2.20% is still likely overstating the health of the economy:
— The "deflater" used in constructing the reported growth rate (reflecting annualized inflation of 1.54%) will seem patently absurd to anyone who lived in the real world during the first quarter of 2012, especially if they bought gasoline or groceries. Using the CPI-U as a deflater makes the headline growth almost completely vanish.
— Even the BEA’s optimistic "deflaters" couldn’t keep the per capita disposable income from shrinking during the quarter.
— Governments continued to shrink their spending, and they sucked -0.60% from the headline number. That trend is unlikely to reverse anytime soon.
— "Real final sales" and factory production continued to be supported by inventory building — which is unsustainable and must ultimately reverse (even if the cost of carrying the inventories has been kept artificially low by the Fed).
Our bottom line for the economy has always been the health of households. This report shows per capita disposable income is shrinking and that any improvements in consumer spending are likely unsustainable. We suspect that the softening seen in this report the harbinger of a collapsing "recovery" that will continue to unfold during 2012.