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  April 26, 2019 - BEA Estimates 1st Quarter 2019 GDP Growth at 3.18%:

In their first (preliminary) estimate of the US GDP for the first quarter of 2019, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +3.18% annual rate, up +1.02 percentage points (pp) from the prior quarter.

The good news in the report came from significantly positive contributions from inventories, governmental spending and foreign trade. The bad news is that the growth rates for the "meat and potatoes" portion of the economy -- consumer spending on goods and services, and fixed investment -- all weakened quarter-to-quarter.

Consumer spending on goods contracted at a -0.14% annualized rate during the quarter, down -0.68pp from the prior quarter. This was accompanied by weaker growth in consumer spending on services, which dropped -0.16pp from the prior quarter to a +0.98% growth rate. And commercial/private fixed investment grew at a lower +0.27% annualized rate, down -0.27pp from the fourth quarter.

Meanwhile two thirds of the reported annualized growth came from non-core line items: inventories grew at a +0.65% annualized rate (up +0.54pp from the prior quarter), governmental spending grew at a +0.41% annualized rate (up +0.48pp from the fourth quarter), exports grew at a +0.45% annualized rate (up +0.23pp from the prior quarter), and imports added yet another +0.58pp to the headline number (up a significant +0.88pp from 4Q-2018).

Household disposable income was reported to be up +$200 per annum on a quarter over quarter basis, and the household savings rate was reported to have grown to 7.0% (up +0.2pp from the prior quarter) as consumers spent less on goods.

For this estimate the BEA assumed an effective annualized deflator of 0.64%. During the same quarter (January 2019 through March 2019) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was materially higher at 2.27%. 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 halved to a +1.56% annualized growth rate.

Among the notable items in the report :

-- Consumer spending for goods contracted during the first quarter of 2019. The headline contribution from consumer goods spending was reported to be -0.14%, down -0.68pp from the prior quarter.

-- The contribution to the headline from consumer spending on services was reported to be +0.96%, down -0.16pp from the prior quarter. The combined consumer contribution to the headline number was reported to be down -0.84pp from the prior quarter, marking the third consecutive quarter of weakening growth in consumer spending.

-- The headline contribution for commercial/private fixed investments was reported to be +0.27%, down -0.27pp from the prior quarter. Although investment in residential construction continued to contract, the biggest change came from weakening commercial spending on equipment.

-- Inventories boosted the headline number by +0.65pp, up +0.54pp 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.

-- During the quarter containing the "Great Shutdown," Federal spending was reported to be flat while state and local spending rebounded enough to provide a combined +0.41% annualized governmental spending growth rate, up +0.48pp from the prior quarter.

-- The annualized growth in exports was reported to be +0.45%, up +0.23pp from the prior quarter.

-- Although imports normally subtract from the headline number, in the first quarter imports actually added +0.58% annualized "growth" to the headline number (after subtracting -0.30% annualized "growth" during the prior quarter) -- economic "growth" by virtue of fewer dollars of imported goods. This is imports' greatest positive boost to the headline since 4Q-2012, and it reflects the second consecutive quarterly contraction in the value of imported goods. In aggregate, foreign trade added +1.03% annualized growth to the headline number.

-- The annualized growth in the "real final sales of domestic product" increased to +2.53%, up +0.48pp 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 $200 quarter over quarter. The annualized household savings rate was also reported to have increased to 7.0% (up +0.2pp from the prior quarter), providing the offset to the contracting spending for consumer goods.

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) $21.1 = $14.3 + $3.8 + $3.6 + $-0.6
% of GDP 100.00% = 67.66% + 18.11% + 17.09% + -2.86%
Contribution to GDP Growth % 3.18% = 0.82% + 0.92% + 0.41% + 1.03%

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

1Q-2019 4Q-2018 3Q-2018 2Q-2018 1Q-2018 4Q-2017 3Q-2017 2Q-2017 1Q-2017 4Q-2016 3Q-2016 2Q-2016 1Q-2016
Total GDP Growth 3.18% 2.16% 3.36% 4.16% 2.22% 2.29% 2.82% 3.00% 1.79% 1.77% 1.92% 2.28% 1.54%
Consumer Goods -0.14% 0.54% 0.90% 1.16% -0.13% 1.42% 0.86% 1.17% 0.40% 0.58% 0.70% 1.01% 0.72%
Consumer Services 0.96% 1.12% 1.47% 1.42% 0.49% 1.22% 0.65% 0.79% 0.82% 1.17% 1.09% 1.29% 0.90%
Fixed Investment 0.27% 0.54% 0.21% 1.10% 1.34% 1.04% 0.44% 0.72% 1.60% 0.28% 0.52% 0.46% 0.31%
Inventories 0.65% 0.11% 2.33% -1.17% 0.27% -0.91% 1.04% 0.23% -0.80% 1.03% -0.59% -0.62% -0.62%
Government 0.41% -0.07% 0.44% 0.43% 0.27% 0.41% -0.18% 0.01% -0.13% 0.03% 0.17% -0.15% 0.60%
Exports 0.45% 0.22% -0.62% 1.12% 0.43% 0.79% 0.42% 0.44% 0.59% -0.44% 0.71% 0.39% -0.31%
Imports 0.58% -0.30% -1.37% 0.10% -0.45% -1.68% -0.41% -0.36% -0.69% -0.88% -0.68% -0.10% -0.06%
Real Final Sales 2.53% 2.05% 1.03% 5.33% 1.95% 3.20% 1.78% 2.77% 2.59 0.74% 2.51% 2.90% 2.16%

Summary and Commentary

Several key points can be taken from this first report for the 1st quarter of 2019 :

-- Consumer spending on goods contracted. The growth in consumer spending on services (which is generally much less elastic) softened yet again. And the annualized growth in commercial and private fixed investments halved relative to the prior quarter.

-- Furloughing Federal workers may depress aggregate consumer spending, but it ultimately has no net effect whatsoever on total Federal expenditures.

-- The fact that imports added +0.58% annualized growth to the headline may be good for the headline, but it actually reflects softening import prices in the midst of generally weaker global trade.

-- Ultimately, and despite weaker core spending, the headline number rebounded into the "Goldilocks" zone of economic growth. We expect that policy makers will be really proud of this report.

Unfortunately, that "Goldilocks" moment was achieved through growing inventories, increased governmental outlays, crashing import values and materially understated inflation. The temperature of the porridge might be just right, but the taste seems a little off.

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