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The Consumer
Metrics Institute, a consultancy with a good track record of
year-ahead economic predictions, is out with its analysis of 3rd quarter GDP.
By and large it's pretty grim. Some excerpts follow without comment, since
the main points pretty much speak for themselves:
In their
second estimate of the third quarter 2011 GDP, the Bureau of Economic
Analysis (BEA) revised the headline growth number downward by over a half
percent to an annualized growth rate of 2.01%. The real story within the
data, however, was that compared to last month's "Advance" estimate
the new report showed substantially weaker commercial fixed investments while
the draw-down of inventory levels was more intense -- putting the new numbers
for third quarter aggregate commercial GDP into net contraction. In general
consumer contributions were slightly weaker, while a substantial downward
revision in imports somewhat softened the bad news in the headline number.
Meanwhile, the public's per-capita disposable income continued to shrink --
but at a newly revised and sharply greater rate.
As usual, this
revision to the prior month's report does not reflect actual changes in the
economy, but rather a month's improvement in the BEA's understanding of what
was happening in the prior quarter. As such it tells us as much about the
BEA's "guesstimating" processes as it does about the economy.
Among the
notable items in the report:
·
Aggregate
consumer expenditures for goods was revised downward slightly to a +0.30%
annualized growth (previously reported to be +0.35%).
·
The annualized
growth rate for consumer expenditures was also revised downward by 0.05%, and
is now estimated to be at 1.33%.
·
The growth
rate of private fixed investments was lowered by 0.15%, with the new number
coming in at 1.45%.
·
The draw-down
of inventories is now nearly a half percent worse than previously reported,
pulling -1.55% from the headline annualized growth rate. Conventional wisdom
is that this bodes well for the economy in the future,
since production will presumably have to eventually ramp-up to replace that
lost inventory.
But in fact
there are a number of wildly conflicting ways to spin this inventory number:
·
Production
has lagged demand, with factories struggling to keep up with increasing
demand (unfortunately implausible given the anemic consumer growth numbers
mentioned above);
·
Factories are
reducing inventories in anticipation of weakening demand (plausible);
·
Inventory
levels were ridiculously high to begin with (implying that much of the
"recovery" was wishful thinking; again plausible);
·
Factories
have simply cut production costs by cutting production levels (thereby
inflating bottom lines without the benefit of increasing commerce; highly
plausible);
·
Or our
favorite: the BEA's deflaters have shot them in the
foot again (with deflating commodity prices "shrinking" inventories
even as physical inventories remain largely unchanged; also highly
plausible).
Of the five
spin scenarios outlined above, the only positive one is also the least
plausible.
·
Total
expenditures by governments at all levels is now
reported to be very slightly contracting, continuing a string of four
quarters of contraction. This number masks a duality in state and local
spending levels, where "consumptive expenditures" (i.e., operating
budgets) continue to shrink but are partially offset by increasing
investments on infrastructure.
·
Exports are
now reported to be slightly higher relative to the previous estimate, raising
the contribution that they made to the overall GDP growth rate to +0.58%.
·
Imports
dropped substantially compared to the previous "Advance" report,
and are now removing only -0.09% from the growth rate of the overall economy
(previously this number was -0.34%, a full quarter of a percent worse for the
headline number).
·
The annualized
growth rate of "real final sales of domestic product" was revised
up slightly to +3.56%. This was the result of the higher draw-down of
inventories offsetting the generally weaker numbers shown elsewhere.
·
Working
backwards from the data tables, the effective "deflater"
used by the BEA to offset the impact of inflation was 2.49%, essentially
unchanged from the previous report. Again, unlike past quarters this number
is generally in the same ball-park as similar data from the BEA's sister
agencies -- which have more tightly tracked the impact of gasoline and
grocery costs over the past year and a half. Substituting the line-item
appropriate (CPI or PPI) current inflation rate published by the Bureau of
Labor Statistics (BLS) causes the "real" GDP growing at a 2.46%
annualized growth rate, somewhat higher than the official headline rate.
·
Perhaps the
most negative item among the revisions is in per-capita disposable income,
which was revised sharply downward and is now reportedly shrinking at an
annualized -2.1% rate during the third quarter (revised from a -1.7% in the
previous "Advance" estimate). If you are looking for one line item
that largely explains the mood of the general public, this is the one to
monitor.
Summary
This report
does not bode well for a number of reasons:
·
The headline
number, at face value, is anemic -- especially given that we are now six
quarters into a "recovery," when numbers well north of 3% should be
expected.
·
When compared
to month-earlier data, this set of revisions again tells us that the BEA has
initially been misreading the economy with an optimistic bias. This follows a
trend that is best exemplified by the massive downward revisions to the
numbers for the "Great Recession" announced by the BEA this past
July. The problem, of course, is that it is not just the public that looks at
this data -- in principle the data exists primarily to inform policy makers.
We're not sure that it is in the best interests of the economy to have policy
makers always looking through rose tinted glasses.
·
The numbers
would be worse if not for a substantial drop in the impact of imports.
Weakening consumption of imported goods may be positive for the BEA's massive
GDP spreadsheet, but we're not convinced that it signals a strong economy
either domestically or globally.
·
The
contracting per-capita disposable income not only explains the public's mood,
it is a bad omen for holiday spending and any hope that this
"recovery" (such as it is) has long to live.
In short, the
BEA reports that growth is poor by historical "recovery" standards
and that consumer disposable income is contracting at a significant rate. And
other factors in the report (including weakening demand for imported goods
and factories lowering inventory levels) indicate that overall levels of
commerce are not nearly as good as the headline number might indicate. This
is neither a ringing endorsement of an ongoing "recovery" nor a
sign that consumers will be the engine of organic growth necessary to sustain
one.
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