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  January 28, 2021 - BEA Reports that Fourth Quarter 2020 GDP Grew at a 4.02% Rate:

In their first (preliminary) estimate of the US GDP for the fourth quarter of 2020, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +4.02% annual rate, down -29.42 percentage points (pp) from the prior quarter.

As always, this report contains numbers that have been annualized from quarter-to-quarter changes. Because Q4 to a large extent resembled Q3 (at least relative to the disastrous Q2), the numbers for the most recent reporting quarter -- including the headline -- are distorted no worse than during a more "normal" year. However, any comparisons to the prior quarter still contain distortions caused by the Q2 collapse. A more meaningful table of year-over-year comparisons is at the bottom of this report.

In an earlier release, annualized household disposable income was reported to be a significant $1,255 lower than in the prior quarter, and the household savings rate was reported to be 13.4%, down -2.7pp from the prior quarter.

For this estimate the BEA assumed an effective annualized deflator of 1.88%. During the same quarter the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was higher at 2.43%. If the BEA's nominal data was deflated using CPI-U inflation information the headline growth number would have been 3.55%.

Among the notable items in the report :

-- Consumer spending for goods was reported to be contracting at a -0.10% rate, down -9.65pp from the prior quarter.

-- The contribution to the headline from consumer spending on services was reported to be 1.80%, down -14.09pp from the prior quarter. The combined consumer contribution to the headline number was 1.70%, down -23.74pp from the prior quarter.

-- The headline contribution for commercial/private fixed investments was reported to be 3.02%, down -2.37pp from the prior quarter.

-- Inventories added 1.04% to the headline number, down -5.53pp 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 contribution to the headline from governmental spending was reported to be -0.22%, up 0.53pp from the prior quarter. All of the remaining contraction was in state and local spending.

-- The contribution from exports was reported to be 2.01%, down -2.88pp from the prior quarter.

-- Imports subtracted -3.53% annualized 'growth' from the headline number, up 4.57pp from the prior quarter. Foreign trade contributed a net -1.52pp to the headline number.

-- The annualized growth in the 'real final sales of domestic product' was reported to be 2.98%, down -23.89pp 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 was reported to have decreased by a material $1,255 quarter to quarter. The annualized household savings rate was 13.4% (down -2.7pp from the prior quarter). In the 50 quarters since 2Q-2008 the cumulative annualized growth rate for real per-capita disposable income has been 1.55%.



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) $21.5 = $14.5 + $3.9 + $3.8 + $-.8
% of GDP 100.00% = 67.72% + 18.20% + 17.83% + -3.75%
Contribution to GDP Growth % 4.02% = 1.70% + 4.06% + -0.22% + -1.52%


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

Q4-2020 Q3-2020 Q2-2020 Q1-2020 Q4-2019 Q3-2019 Q2-2019 Q1-2019 Q4-2018 Q3-2018 Q2-2018 Q1-2018
Total GDP Growth 4.02% 33.44% -31.39% -4.97% 2.37% 2.57% 1.50% 2.94% 1.31% 2.12% 2.70% 3.78%
Consumer Goods -0.10% 9.55% -2.06% 0.03% 0.12% 0.87% 1.57% 0.52% 0.53% 0.60% 0.88% 0.45%
Consumer Services 1.80% 15.89% -21.95% -4.78% 0.96% 0.96% 0.90% 0.73% 0.52% 1.19% 1.25% 0.95%
Fixed Investment 3.02% 5.39% -5.27% -0.23% 0.17% 0.42% -0.07% 0.50% 0.46% 0.14% 0.76% 1.42%
Inventories 1.04% 6.57% -3.50% -1.34% -0.82% -0.09% -0.97% 0.21% 0.23% 1.58% -0.94% 0.41%
Government -0.22% -0.75% 0.77% 0.22% 0.42% 0.37% 0.86% 0.43% -0.16% 0.44% 0.50% 0.26%
Exports 2.01% 4.89% -9.51% -1.12% 0.39% 0.10% -0.54% 0.22% 0.34% -0.66% 0.24% 0.34%
Imports -3.53% -8.10% 10.13% 2.25% 1.13% -0.06% -0.25% 0.33% -0.61% -1.17% 0.01% -0.05%
Real Final Sales 2.98% 26.87% -27.89% -3.63% 3.19% 2.66% 2.47% 2.73% 1.08% 0.54% 3.64% 3.37%




Summary and Commentary

As mentioned above, the best way to view 2020 data is on a year-over-year basis. The quarterly comparisons can be summarized as follows:

Year-Over-Year Change Comparisons

Line Item     Q2 YOY         Q3 YOY         Q4 YOY    
Total GDP Growth -8.48% -1.72% -1.23%
Consumer Goods -3.46% 6.91% 6.54%
Consumer Services -12.46% -5.53% -5.02%
Fixed Investment -7.04% -0.79% 3.65%
Government 2.72% 1.31% 0.67%
Exports -28.89% -17.31% -12.27%
Imports -26.15% -10.50% -1.73%




The above table clearly shows that although the economy has stabilized relative to the free-fall experienced during the second quarter, it remains in modest year-over-year contraction. Spending on consumer goods and commercial fixed investment have bounced back nicely, although spending on consumer services and by state and local governments are still contracting.

As expected, the more serious issue is household income. As bad as the material drop in real household disposable income is, the aggregate number masks a huge disparity among those households -- creating a dramatic new socioeconomic divide between households with Covid safe income streams and those with Covid devastated income streams. Although this new divide often overlays many of the previously existing economic disparities, there are clearly sectors of the workplace where this particular divide has moved many households from "living paycheck to paycheck" to "we have no idea how we are going to pay next month's rent."

The year-over-year numbers and household data contain a simple message: the fat lady ain't gonna sing anytime soon.
 
     

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