Hype Over GDP Statistical Noise

The BEA’s second estimate of Third Quarter GDP came in at 3.2% up from 2.9% in the advance (first) estimate.

by Mish

This had the pundits squawking, but let’s dive into the details to see if anything meaningful happened.

Bloomberg Econoday provides a glowing report, as one might expect from any upgrade, no matter how slight.

The third quarter has gotten a meaningful upgrade. The second estimate is 3 tenths higher than the first, at a plus 3.2 percent annualized rate and which includes an upgrade for consumer spending and, in further good news, a downgrade in inventory growth. Personal consumption expenditures rose at a 2.8 percent pace in the quarter, up 7 tenths from the initial estimate and, outside the 4.3 percent surge in the second quarter, the best showing by the consumer since second quarter last year. Inventories added $7.6 billion in the quarter, down from an initial $12.6 billion in a revision that held down the quarter’s GDP but which will ease concerns of unwanted overhang that could slow fourth-quarter production.
Other details include less downward pull from residential investment, a component that had been strongly positive in prior quarters, and a downgrade for nonresidential investment which is now only marginally in the plus column. Net exports shaved $521.0 billion from the quarter’s total, little changed from the initial estimate, with government purchases a small positive. Price data were shaved lower with the GDP price index revised down 1 tenth to only 1.4 percent.
This report points to greater-than-expected consumer momentum going into the current quarter, helping to explain the big 0.8 percent surge in retail sales for October. The consumer has jobs and is the driving force of the economy.

Consumer Metrics Institute

Rick Davis at the Consumer Metrics Institute provides this GDP analysis.

In their second estimate of the US GDP for the third quarter of 2016, the Bureau of Economic Analysis (BEA) reported that the growth rate was +3.15%, up +0.24% from their previous estimate and up +1.73% from the prior quarter.
Most of the improvement in the headline number came from a +0.42% upward revision to consumer spending. Spending on consumer goods was revised upward by +0.26%, and spending on consumer services was reported to be +0.16% better than previously thought. However, both of these numbers remain below the growth levels recorded in the prior quarter (and were in aggregate -0.99% lower than 2Q-2016). The generally noisy inventory growth rate was revised downward by -0.12% to +0.49%. None of the revisions to the other line items in the report were material.
The BEA’s treatment of inventories can introduce noise and seriously distort the headline number over short terms — which the BEA admits by also publishing a secondary headline that excludes the impact of inventories. The BEA’s “bottom line” (their “Real Final Sales of Domestic Product”) was a +2.66% growth rate, up +0.36% from the previous estimate and now up +0.08% from 2Q-2016.
Real annualized household disposable income was reported to have grown by $176 quarter-to-quarter, to an annualized $39,234 (in 2009 dollars). Not all of that increase was spent; the household savings rate increased +0.2% to 5.9%.
For this revision the BEA assumed a slightly lower effective annualized deflator of 1.39%. During the same quarter (July 2016 through September 2016) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was 1.84%. Under estimating inflation results in correspondingly optimistic growth rates, and if the BEA’s “nominal” data was deflated using CPI-U inflation information the headline growth number would have been lower, at a +2.74% annualized growth rate.
Among the notable items in the report :
— The headline contribution from consumer expenditures for goods increased to a +0.74% growth rate (although it is still down a material -0.77% from the prior quarter).
— The contribution to the headline from consumer spending on services improved to +1.15% (which also remains down -0.22% from the prior quarter). The combined consumer contribution to the headline number was +1.89%, down a significant -0.99% from 2Q-2016.
— The headline contribution from commercial private fixed investments remained negative at -0.15%. Although this is a slightly smaller contraction than during the previous quarter, it still represents the fourth consecutive quarter of contraction in commercial fixed investments.
— The contribution from inventories softened somewhat, adding +0.49% to the headline (while still up up a dramatic +1.65% from 2Q-2016 — after a string of five consecutive quarters of contraction). It is important to remember that the BEA’s inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity price or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.
— The positive headline contribution from governmental spending was essentially halved; it was revised downward by -0.04% to +0.05%. This was still up an historically large +0.35% from the prior quarter. This momentary growth was almost certainly due to increased Federal fiscal year-end (“spend every last budgeted dime — even if we can’t possibly use whatever it is that we are buying”) spending — a recurring annual phenomenon that is accompanied by an offsetting fourth calendar quarter (first fiscal quarter) reversal of that growth.
— The contribution to the headline number from exports improved slightly to +1.18% (up +0.01% in this revision and +0.97% from the prior quarter).
— Imports subtracted -0.31% from the headline number, up +0.03% in this revision but down -0.28% from the prior quarter.
— The “real final sales of domestic product” was revised upward +0.36% to +2.66%, and it is up +0.08% from the prior quarter. This is the BEA’s “bottom line” measurement of the economy and it excludes the reported inventory growth.
— As mentioned above, real per-capita annual disposable income was reported to have grown $176 quarter-to-quarter in this report. At the same time the household savings rate was revised to 5.9%, the same level recorded in the second quarter of 2016. It is important to keep this line item in perspective: real per-capita annual disposable income is up only +6.97% in aggregate since the second quarter of 2008 — a meager annualized +0.82% growth rate over the past 33 quarters.

Crowing over Statistical Noise

Any crowing by Econoday, especially talk of a “meaningful upgrade” is beyond silly.

GDP reports are annualized which quadruples changes. Mentally take that 0.3 percentage point upgrade and divide it by four. Does it still look meaningful?

Also pay attention to Davis’ final comment “Real per-capita annual disposable income is up only +6.97% in aggregate since the second quarter of 2008 — a meager annualized +0.82% growth rate over the past 33 quarters.

Compare that statement to Econoday’s “The consumer has jobs and is the driving force of the economy.”

I remind Econoday to think about the election of Trump and why people are angry before crowing such nonsense.

And the consumer is not the driver of the economy in the first place. Production, not consumption is what dictates growth.

Mike “Mish” Shedlock