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  September 26, 2014 - BEA Revises 2nd Quarter 2014 GDP Growth Up Again to 4.59% Annualized Rate:

In their third estimate of the US GDP for the second quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a +4.59% annualized rate, up about a half a percent yet again from their previous estimate. When compared to the prior quarter, the new measurement is now up 6.7% from a -2.11% contraction rate for the 1st quarter of 2014. This level of quarter to quarter improvement in GDP growth is truly rare; this is the best since the 2nd quarter of 2000, and the second best since the 2nd quarter of 1982.

The positive revisions to the growth contributions during the 2nd quarter growth were in commercial fixed investments (+0.20%), exports (+0.12%), consumer expenditures (+0.05%), governmental expenditures (+0.04%) and inventories (+0.03%). The only downside revision was to imports (-0.03%). The "real final sales of domestic product" growth improved by about a half percent to +3.17%

Real annualized per-capita disposable income was reported to be $37,494 -- up $13 per year from the previous estimate, but still down $375 from the 4th quarter of 2012. As mentioned last month, a significant portion of that increased disposable income went into savings, with the savings rate increasing to 5.4% -- the highest savings level since 4Q-2012.

For this report the BEA effectively assumed annualized quarterly inflation of 2.15%. During the second quarter (i.e., from April through June) the growth rate of the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was over one and a third percent higher at a 3.53% (annualized) rate, and the price index reported by the Billion Prices Project (BPP -- which arguably reflected the real experiences of American households) was over a half of a percent higher at 2.72%. Under reported inflation will result in overly optimistic growth data, and if the BEA's numbers were corrected for inflation using the BLS CPI-U the economy would be reported to be growing at a 3.31% annualized rate. If we were to use the BPP data to adjust for inflation, the quarter's growth rate would have been 4.12%.

Among the notable items in the report :

-- The headline contribution of consumer expenditures for goods was 1.33% (up +0.03% from the previous report).

-- The contribution made by consumer services spending increased to 0.42% (up +0.02% from the 0.40% reported last month). The combined contribution to the headline number by consumers was 1.75%, up +0.05 from the prior report.

-- Commercial private fixed investments provided 1.45% of the headline number (up +0.20% from the 1.25% in the earlier estimate), and this uptick continues to be mostly in non-residential construction.

-- Inventories growth added 1.42% to the headline number (up +0.03% from the second estimate).

-- Governmental spending was up +0.04%, now adding 0.31% to the headline. The improvement was all at a state and local level, in spending on infrastructure investment.

-- Exports are now reported to be adding 1.43% to the headline growth rate (up +0.12% from last month's estimate).

-- Imports subtracted -1.77% from the headline number (a -0.03% deterioration from the previous report). The combined impact of the foreign trade revisions on the headline number improved by nearly 0.1%.

-- The annualized growth rate for the "real final sales of domestic product" is now reported to be 3.17% (up +0.38% from the earlier estimate). This is the BEA's "bottom line" measurement of the economy, and it is lower than the headline number because of the growing inventories.

-- And as mentioned above, real per-capita annual disposable income was $13 per year higher than previously reported. The revised number represents an annualized growth rate of 3.68%, the highest reported growth rate since the fourth quarter of 2012. That said, the real disposable income is still down a material -$375 per year from that same fourth quarter of 2012 (before the FICA rates normalized) and it is up only 2.23% in total since the second quarter of 2008 -- a miserable 0.37% annualized growth rate over the past 6 years.

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) $17.3 = $11.9 + $2.8 + $3.2 + $-0.5
% of GDP 100.0% = 68.5% + 16.4% + 18.3% + -3.2%
Contribution to GDP Growth % 4.59% = 1.75% + 2.87% + 0.31% + -0.34%

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-2014 1Q-2014 4Q-2013 3Q-2013 2Q-2013 1Q-2013 4Q-2012 3Q-2012 2Q-2012 1Q-2012 4Q-2011 3Q-2011 2Q-2011 1Q-2011
Total GDP Growth 4.59% -2.11% 3.50% 4.51% 1.77% 2.75% 0.06% 2.48% 1.62% 2.25% 4.59% 0.84% 2.94% -1.53%
Consumer Goods 1.33% 0.23% 0.83% 0.80% 0.30% 1.35% 0.67% 0.74% 0.29% 1.06% 0.90% 0.20% -0.18% 0.66%
Consumer Services 0.42% 0.60% 1.69% 0.59% 0.93% 1.11% 0.65% 0.58% 0.57% 0.81% 0.04% 1.00% 0.75% 0.72%
Fixed Investment 1.45% 0.03% 0.95% 1.01% 0.74% 0.42% 0.96% 0.45% 0.61% 1.24% 1.36% 2.25% 1.10% -0.11%
Inventories 1.42% -1.16% -0.34% 1.49% 0.30% 0.70% -1.80% -0.19% 0.27% -0.20% 2.80% -2.10% 1.04% -0.96%
Government 0.31% -0.15% -0.71% 0.04% 0.04% -0.75% -1.20% 0.52% -0.08% -0.56% -0.31% -0.52% -0.08% -1.60%
Exports 1.43% -1.30% 1.30% 0.67% 0.82% -0.12% 0.19% 0.28% 0.64% 0.19% 0.56% 0.57% 0.82% 0.27%
Imports -1.77% -0.36% -0.22% -0.09% -1.36% 0.04% 0.59% 0.10% -0.68% -0.29% -0.76% -0.56% -0.51% -0.51%
Real Final Sales 3.17% -0.95% 3.84% 3.02% 1.47% 2.05% 1.86% 2.67% 1.35% 2.45% 1.79% 2.94% 1.90% -0.57%

Summary and Commentary

This report once again strengthens the Fed's hand for completing the QE taper, which should finish before the next GDP report. An economy that is reported to be growing at 4.6% might be argued to be tipping gently towards overheating, especially when the quarter to quarter change of +6.7% is taken into consideration. This report can also be conveniently spun by political hacks into a "happy days are here again" message while heading into the final month before midterm elections.

We repeat that at purely "face value" this report also purports to show a strongly rebounding US economy driven by commercial fixed investments, growing inventories, surging exports and a modestly healthy consumer. The +6.7% quarter to quarter change is truly remarkable: if we view the 2Q-2000 report as somewhat noisy and spurious (since the purported gain was more than fully reversed during the next quarter), we have to go back over 30 years into the early 1980's to find such a dynamic quarterly turn-around (provided, of course, that the current +6.7% turn-around is less spurious than the one reported in 2Q-2000).

We caution that a "face value" reading could be seriously misleading. Let's quickly review the reasons for our concern:

-- Consumer spending provided 38% of the headline growth while representing nearly 70% of the spending. Real per-capita disposable income has grown only 2% (in aggregate!) since 2008, at a minuscule 0.37% annualized rate. Household spending remains constrained, and a healthy (and increasing) savings rate indicates that the majority of consumers remain skeptical about the veracity and sustainability of this purported "recovery."

-- Inventories tend to revert to their means. This quarter's inventory growth is essentially the flip side of last quarter's contraction in what is (over the long haul) a largely zero-sum series.

-- Surging exports fly in the face of both softening economic growth among our major trading partners and a strengthening dollar. When trade fully re-acclimates to the new exchange realities it will be the export numbers that will suffer the most.

It is here that we would normally caution that a plausibly noisy "final" 2nd quarter growth could get reversed in the next quarter's first report, just as it did in 2000. But we also need to remind you that the next report will be issued just 5 days before the mid-term elections. In 2000, the next report after the flaky "final" 2Q-2000 numbers was also just days before a major election, and the bombshell reversal of economic fortunes did not treat the incumbents quite so well.

The next report should be interesting.

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