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  February 28, 2019 - BEA Estimates 4th Quarter 2018 GDP Growth at 2.58%:

In their first (shutdown delayed) estimate of the US GDP for the fourth quarter of 2018, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +2.58% annual rate, down -0.78 percentage points (pp) from the prior quarter.

The relatively modest -0.78pp aggregate/net quarter-to-quarter change in the headline number masks a number of significant changes in the underlying line items: annualized inventory growth dropped over two percentage points (-2.20pp) quarter over quarter, foreign trade added +1.77pp to the headline relative to 3Q-2018, and consumer spending growth weakened by -0.46pp quarter-to-quarter. The previously strong growth in governmental spending mostly evaporated (down to an annualized +0.07%), while commercial fixed investments accelerated to a +0.69% annualized growth rate.

Household disposable income was reported to be up +$381 per annum on a quarter over quarter basis, and the household savings rate was reported to be 6.7% (up +0.3pp from the prior quarter).

For this estimate the BEA assumed an effective annualized deflator of 1.96%. During the same quarter (October 2018 through December 2018) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was materially smaller at 1.14% -- a little more than half of the BEA's number. Over estimating inflation results in pessimistic growth rates, and if the BEA's "nominal" data was deflated using CPI-U inflation information the headline growth number would have been significantly higher at a +3.45% annualized growth rate.

Among the notable items in the report :

-- The headline contribution from consumer expenditures for goods was reported to be +0.80pp, down -0.10pp from the +0.90% annualized growth rate recorded in the prior quarter.

-- The contribution to the headline from consumer spending on services was reported to be +1.11pp, down -0.36pp from the prior quarter. The combined consumer contribution to the headline number was reported to be down -0.46pp from the prior quarter, marking the second consecutive quarter of weakening growth in consumer spending.

-- The headline number for commercial/private fixed investments was reported to be up +0.48pp, to an annualized +0.69% growth rate.

-- Inventories boosted the headline number by a mere +0.13pp, down -2.20pp 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 weakened significantly, contributing only +0.07% annualized growth to the headline number (down -0.37pp from the prior quarter).

-- The prior quarter's crash in exports reversed with a vengeance, adding +0.19pp to the headline number after removing -0.62pp in the prior quarter.

-- Imports also strengthened materially, subtracting only -0.41% annualized growth from the headline, some +0.96pp better than the prior quarter. In aggregate, foreign trade negatively impacted the headline number by only -0.22pp, a full +1.77pp better than 3Q-2018.

-- The annualized growth in the "real final sales of domestic product" jumped to +2.45% as a consequence of the weakened inventory growth, up +1.42pp 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 annualized disposable income grew by $381 quarter over quarter, and $1,129 (2.62%) year over year. The annualized household savings rate was also reported to have increased to 6.7% (up +0.3pp from the prior quarter).

The Numbers

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) $20.9 = $14.2 + $3.8 + $3.6 + $-0.7
% of GDP 100.00% = 67.97% + 18.07% + 17.12% + -3.16%
Contribution to GDP Growth % 2.58% = 1.91% + 0.82% + 0.07% + -0.22%

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-2018 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 2.58% 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 0.80% 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 1.11% 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 0.69% 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 0.13% 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 0.07% 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 0.19% -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 -0.41% -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 2.45% 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

This initial report for the 4th quarter of 2018 (delayed for a month by the "Great Shutdown") is interesting in a number of ways :

-- The net headline number remains in the "Goldilocks" zone, neither too hot or too cold. In fact, at surface value, it can't justify a change in Federal Reserve policy in any direction. Clearly the Fed is stepping away from tightening because of the condition of the markets, not the condition of the economy.

-- That said, a deeper dive into the numbers reveals a second consecutive quarter of weakening growth in consumer spending. And the increase in the household savings rate explains to a large extent where any additional disposable income is actually going -- into savings in lieu of spending.

-- The unsustainable growth in inventories that propped up last quarter's gaudy headline has vanished. But it has been largely replaced by a dramatic (and equally unsustainable) swing in foreign trade.

We don't pretend to understand the intricacies of household or consumer psychology. However, our own data suggests that, from time to time, consumer sentiment and spending can be suppressed by FUD ("Fear, Uncertainty and Doubt"). And the US political stage is currently generating a lot of FUD. How that FUD is damaging the household/consumer psyche -- and hence the economy -- will become better understood over the next few quarters.

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