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mining tracking data for an understanding of what American consumers were doing yesterday."

     
  January 27, 2022 - BEA Reports that Fourth Quarter 2021 GDP Grew at a 6.89% Rate:

In their first (preliminary) estimate of the US GDP for the fourth quarter of 2021, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a 6.89% annual rate, up 4.59 percentage points (pp) from the prior quarter.

Unfortunately, over 70% of the headline number (4.90pp) came from growing inventories, while arguably another 25% came from underestimated inflation. The growth rate for consumer spending on goods was a meager 0.13%, and spending on consumer services was reported to be a modest 2.12%, down 1.45pp from the prior quarter.

In an earlier release, annualized household disposable income was reported to be $740 lower than in the prior quarter, and the household savings rate was reported to be 7.4%, down 2.1pp from the prior quarter.

For this estimate the BEA assumed an effective annualized deflator of 6.96%. During the same quarter the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was higher at 9.13%. 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 5.20% -- almost entirely growing inventories.

Among the notable items in the report :

-- Consumer spending for goods was reported to be growing at a 0.13% rate, up 2.34pp from the prior quarter.

-- The contribution to the headline from consumer spending on services was reported to be 2.12%, down 1.45pp from the prior quarter. The combined consumer contribution to the headline number was 2.25%, up 0.89pp from the prior quarter.

-- The headline contribution for commercial/private fixed investments was reported to be 0.25%, up 0.41pp from the prior quarter.

-- Inventories added 4.90% to the headline number, up 2.70pp 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 -0.51%, down 0.68pp from the prior quarter.

-- The contribution from exports was reported to be 2.43%, up 3.02pp from the prior quarter.

-- Imports subtracted an offsetting 2.43% annualized 'growth' from the headline number, down 1.75pp from the prior quarter. Foreign trade contributed a net zero percentage points to the headline number.

-- The annualized growth in the 'real final sales of domestic product' was reported to be 1.99%, up 1.89pp 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 $740 quarter to quarter. The annualized household savings rate was 7.4% (down 2.1pp from the prior quarter). In the 54 quarters since 2Q-2008 the cumulative annualized growth rate for real per-capita disposable income has been 1.35%.



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) $24.0 = $16.3 + $4.5 + $4.1 + $-1.0
% of GDP 100.00% = 68.14% + 18.67% + 17.21% + -4.01%
Contribution to GDP Growth % 6.89% = 2.25% + 5.15% + -0.51% + 0.00%


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

Q4-2021 Q3-2021 Q2-2021 Q1-2021 Q4-2020 Q3-2020 Q2-2020 Q1-2020 Q4-2019 Q3-2019 Q2-2019 Q1-2019
Total GDP Growth 6.89% 2.30% 6.72% 6.28% 4.54% 33.79% -31.24% -5.13% 1.89% 2.77% 3.22% 2.41%
Consumer Goods 0.13% -2.21% 2.99% 5.69% -0.07% 9.92% -1.89% 0.04% 0.35% 0.99% 1.42% 0.29%
Consumer Services 2.12% 3.57% 4.93% 1.75% 2.34% 15.59% -22.21% -4.83% 0.77% 1.13% 0.95% 0.14%
Fixed Investment 0.25% -0.16% 0.61% 2.25% 2.92% 4.88% -5.63% -0.41% -0.19% 0.54% 1.06% 0.64%
Inventories 4.90% 2.20% -1.26% -2.62% 1.10% 6.84% -4.01% -0.51% -0.99% -0.32% -0.57% 0.49%
Government -0.51% 0.17% -0.36% 0.77% -0.09% -0.19% 0.97% 0.63% 0.52% 0.36% 0.86% 0.47%
Exports 2.43% -0.59% 0.80% -0.30% 2.07% 4.64% -8.34% -1.95% 0.17% -0.08% -0.26% 0.36%
Imports -2.43% -0.68% -0.99% -1.26% -3.73% -7.89% 9.87% 1.90% 1.26% 0.15% -0.24% 0.02%
Real Final Sales 1.99% 0.10% 7.98% 8.90% 3.44% 26.95% -27.23% -4.62% 2.88% 3.09% 3.79% 1.92%




Summary and Commentary

The key points of this report can be summarized as follows:

-- US economic growth in the fourth quarter of 2021 is materially misrepresented by the headline number.

-- The BEA's own "bottom line" number ("Real Final Sales") is less than a third of the headline at 1.99%.

-- Even the BEA's more reasonable "bottom line" number is significantly boosted by under-recognized inflation.

-- Since inventories are a long term zero-sum number, what they give to the headline this quarter will certainly be taken away in future quarters. Companies overbought stock for what turned out to be a disappointing holiday season, by either overreacting to "supply chain" concerns or badly misreading household spending plans -- or both, since the heavy media coverage of the supply chain issues and lower household spending plans are likely related.

-- Household savings rates have moderated, with the moderation coming primarily from the reported lower disposable incomes.

Every now and then the BEA's headline number wildly misrepresents the state of the economy. This is one of those times. Politicians will gladly cite the headline as proof of a healthy and growing economy. The truth is far murkier.
 
     

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