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  December 21, 2018 - BEA Revised 3rd Quarter 2018 GDP Slightly Downward to 3.36%:

In their third and final estimate of the US GDP for the third quarter of 2018, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +3.36% annual rate, down -0.14% from their previous estimate and down -0.80% from the prior quarter.

Although the revisions can be characterized as statistical noise, they generally reinforce several key movements in the economy since the second quarter: consumer spending, commercial spending and exports were revised lower, while inventories were yet again revised upward. As a consequence, the BEA's "bottom line" measurement of the economy (the "real final sales of domestic product") was revised downward by another -0.20% (to only +1.03%), and it is now down by well over four percent (-4.30%) from the prior quarter.

The total headline contribution from consumer spending was revised downward another -0.08%, and it is now down -1.06% from the prior quarter. The growth in commercial fixed investment was revised downward -0.04%, while government spending was unchanged. Foreign trade was revised a combined -0.08% downward, and it is now removing -1.99% from the headline number (off -3.21% from the prior quarter).

And continuing the prior trend, the headline number has been propped up even more by the most fickle of the BEA's data items: inventories; which are now adding +3.50% more to the headline than they did during the prior quarter. Meanwhile, household disposable income and the household savings rates were left unchanged.

For this revision the BEA assumed an effective annualized deflator of 1.50%. During the same quarter (July 2018 through September 2018) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was somewhat higher at 1.83%. Under estimating inflation results in optimistic growth rates, and if the BEA's "nominal" data was deflated using CPI-U inflation information the headline growth number would have been somewhat lower at a +3.09% annualized growth rate.

Among the notable items in the report :

-- The headline contribution from consumer expenditures for goods was revised downward -0.10% to +0.90%, and it is now down -0.26% from the prior quarter.

-- The contribution to the headline from consumer spending on services was revised upward +0.02% to +1.47%, up +0.05% from last quarter. The combined consumer contribution to the headline number was revised downward -0.08% to +2.37%, down -0.21% from the prior quarter.

-- Commercial private fixed investments was revised downward -0.04%, and it is now contributing +0.21 to the headline number. This remains down -0.89% from the prior quarter.

-- Inventories boosted the headline number by +2.33%, up +0.06% from the previous estimate and up +3.50% from the prior quarter. It is important to remember that the BEA's inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity pricing or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.

-- The growth in governmental spending was left unchanged, and it is contributing +0.44% to the headline number (and it is up only +0.01% from the prior quarter).

-- The exports crash was even worse than previously reported, and it is now subtracting -0.62% from the headline number, down -0.07% from the previous report and -1.74% from the prior quarter.

-- Imports were largely unchanged in this report, subtracting -1.37% from the headline number (down -0.01% from the previous report and down -1.44% from the prior quarter). In aggregate, foreign trade negatively impacted the headline number by nearly two percent (-1.99%).

-- The "real final sales of domestic product" growth was revised downward by -0.20% to +1.03%, and it is down over four percent (-4.30%) from the prior quarter. This is the BEA's "bottom line" measurement of the economy and it excludes the inventory data.

-- As mentioned above, real per-capita annual disposable income was unchanged, and it is up $169 per annum from a revised prior quarter. The household savings rate was also reported to be unchanged at 6.3% (down -0.4% from the revised prior quarter).



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) $20.7 = $14.1 + $3.7 + $3.6 + $-0.7
% of GDP 100.00% = 68.01% + 17.96% + 17.19% + -3.16%
Contribution to GDP Growth % 3.36% = 2.37% + 2.54% + 0.44% + -1.99%


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

3Q-2018 2Q-2018 1Q-2018 4Q-2017 3Q-2017 2Q-2017 1Q-2017 4Q-2016 3Q-2016 2Q-2016 1Q-2016 4Q-2015 3Q-2015 2Q-2015 1Q-2015
Total GDP Growth 3.36% 4.16% 2.22% 2.29% 2.82% 3.00% 1.79% 1.77% 1.92% 2.28% 1.54% 0.41% 0.97% 3.35% 3.32%
Consumer Goods 0.90% 1.16% -0.13% 1.42% 0.86% 1.17% 0.40% 0.58% 0.70% 1.01% 0.72% 0.51% 0.91% 1.02% 0.94%
Consumer Services 1.47% 1.42% 0.49% 1.22% 0.65% 0.79% 0.82% 1.17% 1.09% 1.29% 0.90% 1.02% 1.00% 1.29% 1.41%
Fixed Investment 0.21% 1.10% 1.34% 1.04% 0.44% 0.72% 1.60% 0.28% 0.52% 0.46% 0.31% -0.33% 0.51% 0.63% -0.01%
Inventories 2.33% -1.17% 0.27% -0.91% 1.04% 0.23% -0.80% 1.03% -0.59% -0.62% -0.62% -0.70% -0.73% -0.25% 2.16%
Government 0.44% 0.43% 0.27% 0.41% -0.18% 0.01% -0.13% 0.03% 0.17% -0.15% 0.60% 0.12% 0.33% 0.70% 0.40%
Exports -0.62% 1.12% 0.43% 0.79% 0.42% 0.44% 0.59% -0.44% 0.71% 0.39% -0.31% -0.28% -0.44% 0.48% -0.56%
Imports -1.37% 0.10% -0.45% -1.68% -0.41% -0.36% -0.69% -0.88% -0.68% -0.10% -0.06% 0.07% -0.61% -0.49% -1.02%
Real Final Sales 1.03% 5.33% 1.95% 3.20% 1.78% 2.77% 2.59 0.74% 2.51% 2.90% 2.16% 1.11% 1.70% 3.60% 1.16%




Summary and Commentary

Although none of the revisions in the report were material by themselves, their combined net effect reinforced the previous report's story -- that the growth rates for consumer and commercial spending was weakening, with inventories growing as a consequence. Additionally, foreign trade is now removing another -3.21% from the headline, quarter over quarter.

The BEA tells us that the key number in any of their GDP reports is the "real final sales of domestic product." That number is now reported to be down an alarming -4.30% from the prior quarter.

As we have mentioned before, this report shows an economy that appears to be either coasting or at an inflection point. The results from the fourth quarter should tell us much more about what direction it is heading.
 
     

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