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  February 27, 2015 - BEA Revises 4th Quarter 2014 GDP Growth Downward to 2.18%:

In their second estimate of the US GDP for the fourth quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a +2.18% annualized rate, down roughly a half percent (-0.46%) from the +2.64% previously reported and down -2.78% from the growth rate reported for the prior quarter.

The downward revisions were in several of its components: lower inventory growth removed -0.70% from the headline growth rate, slower consumer goods spending removed another -0.19%, and imports took yet another -0.19%.

Consumer services spending was revised upward +0.15%, and non-residential fixed investment was reported to be +0.34% higher than previously published.

Real annualized per capita disposable income was revised downward by -$33 (now reported to be $37,742 per annum). This is down $90 per year from the 4th quarter of 2012. The household savings rate improved +0.1% for the quarter to 4.7%.

As mentioned last month, plunging energy prices during the quarter were likely playing havoc with many of the numbers in this report. US "at the pump" gasoline prices fell 33% quarter-to-quarter -- pushing all consumer oriented inflation indexes firmly into negative territory. During the fourth quarter (i.e., from October through December) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was solidly dis-inflationary at a -2.47% (annualized) rate, and the price index reported by the Billion Prices Project (BPP -- which arguably more fully reflected the "at the pump" impact on American households) was significantly more dis-inflationary, dropping a full -2.14% quarter-to-quarter (an astounding -8.30% annualized rate during the quarter).

Yet for this report the BEA still assumed a very mildly dis-inflationary annualized deflator of only -0.14%. The disparity between the BEA's and the BLS's "deflators" raises some serious consistency issues. Over reported inflation (or under reported dis-inflation) will result in a more pessimistic growth data, and if the BEA's "nominal" numbers were corrected for inflation using the line-item appropriate BLS CPI-U and PPI indexes, the economy would be reported to be growing at an implausibly high 6.52% annualized rate. Clearly the BEA's deflator is troubling, but using the more reasonable deflators from the BLS generates nonsensical growth rates when applied to the BEA's nominal data -- suggesting that the BEA's initial nominal data may be more overstated (or guesstimated) than reasonable deflators can handle.

Among the notable items in the report :

-- The headline contribution from consumer expenditures for goods was +1.01% (down -0.19% from the prior estimate).

-- The contribution made by consumer services spending to the headline increased to +1.82% (up +0.15% from the previous report). The combined consumer contribution to the headline number was 2.83%, down -0.04% from the prior estimate.

-- Commercial private fixed investments provided +0.71% of the headline number (up +0.34% from the previous report, but down -0.50% from the 1.21% in the 3rd quarter), and this drop was nearly all in heavy equipment (industrial and transportation). The reported growth came almost entirely from IT spending and intellectual property.

-- Inventories contributed +0.12% to the headline number (down a full -0.70% from the prior estimate).

-- Governmental spending removed -0.32% from the headline (up +0.08% from the previous report but down -1.12% from the 3rd quarter). As mentioned last month, the prior quarter's growth in Federal spending was in fact entirely spurious: spending pulled forward from the 4th quarter as a result of fiscal year-end budgetary maneuvers.

-- Exports are now reported to be contributing +0.42% to the headline growth rate (up +0.05% from the previous estimate).

-- Imports subtracted -1.58% from the headline number (down -1.74% from the prior quarter).

-- The annualized growth rate for the "real final sales of domestic product" is now reported to be +2.06% (down -2.93% from the prior quarter). This is the BEA's "bottom line" measurement of the economy.

-- And as mentioned above, real per-capita annual disposable income was revised downward by -$33 per year. The new number represents an annualized growth rate of +2.95%. Real disposable income is still down -$90 per year from the fourth quarter of 2012 (before the FICA rates normalized) and it is up only +2.90% in total since the second quarter of 2008 -- a pathetic +0.44% annualized growth rate over the past 6 and a half 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) $17.7 = $12.1 + $3.0 + $3.2 + $-0.6
% of GDP 100.0% = 68.4% + 16.7% + 18.0% + -3.1%
Contribution to GDP Growth % 2.18% = 2.83% + 0.83% + -0.32% + -1.16%

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

4Q-2014 3Q-2014 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 2.18% 4.96% 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 1.01% 1.06% 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 1.82% 1.15% 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 0.71% 1.21% 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 0.12% -0.03% 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 -0.32% 0.80% 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 0.42% 0.61% 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 -1.58% 0.16% -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 2.06% 4.99% 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

The revisions in this report are relatively minor, and probably should be considered just "noise" in the context of an economy with a slowing growth rate. Among our observations about this report are:

-- At face value, the +2.06% "bottom line" Real Final Sales growth rate seems plausible for the US economy during the fourth quarter of 2014.

-- The reported strong growth in fixed investment occurred primarily in two areas: IT spending and the recently added (and very fuzzy) arena of "intellectual property."

-- Rampant or rouge deflators are likely as much a factor in the headline number as real growth.

Looking forward, we are often told that "bad weather" is a major factor in first quarter economic data -- keeping shoppers home and suppressing construction work. Given the quarter-to-quarter weakening already evident in the GDP numbers, the first quarter probably wasn't going to be particularly pleasant even before the recent record snowfalls. It could now be getting just as nasty as the weather itself.

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