August 11, 2013

Weak 2ndQ2013 GDP

August 11, 2013

Weak 2ndQ2013 GDP

2nd Quarter 2013


This is the first GDP report issues having extensive redefinitions. Essentially, what BEA is now doing is converting some line items from a cash basis to an accrual basis. I think that this is motivated by recognition that intellectual property has become a more significant factor in the economy. For example, the cost of the production of entertainment (movies and music) are now capitalized. Interestingly, the cost of pension fund obligations for public employees are now capitalized even if these are not funded. The data going back to 1929 was changed to reflect these changes so there is no significant effect on the quarter-to-quarter change for 2ndQ2013 vs. the previous quarter.


For both myself and Rick the most frustrating this about the BEA data is the revisions which occur after these reports are first issued. Growth in the 1stQ2013 was revised down from +1.78% to +1.14% making the data for the 2ndQ2013 look fatter only by comparison. The data for the 2ndQ2013 was 1.04% higher than the previously announced 1stQ data.


Also the 1stQ2011 was revised down from +0.08% to -1.29% a contraction we are noting 2 years late. Data for the 4 quarters previous to the new report were all revised down.


In my view the data shows pathetic economic growth and, worse yet, an inability of BEA to accurately report the data. There is a pattern here. The July revisions usually show downward revisions to the prior 4 quarters and upward revisions to the 4 quarters preceding those (i.e. 5-8 quarters ago.) The GDP report is perhaps the single most important release each quarter (and each month with revisions) and we should expect better.


Superimposed on top of the fact that the data is both weak and inaccurate we have absurd reporting of the data by the media. The headline was that the GDP data was “better than expected.” The fact is that the data was horrible. I hope that the folks who prepare these reports will, if the wind up in hell, find that it is better than expected.


In may be the case that the real message here is that 3% or more GDP growth is a thing of the past and in the future we will have 2% or less GDP growth. If that is true then there need to be substantial revisions to fiscal policy but that’s another newsletter.


At present I offer these observations about GDP:


1) The newest report is weak

2) the data is even worse than the headline because the headline announced an increase over a lowered data point

3) one wonders if BEA can measure GDP accurately enough to make the data usable. For example, it is not practical to do anything now that we now know for the first time that GDP actually contracted in 1stQ2011

4) economic media reporting has a ridiculously rosy view of the economy. A story I read in last weekend’s S.F. Chronicle said that fundamentals for that week were generally positive and devoted not a single word to GDP a sort of “Other than that Mrs. Lincoln, how was the play” comment.

5) demographics have changed in a manner which will restrain GDP in the next decades. The fiscal implications are enormous. The labor participation rate continues to fall and somehow we expect a smaller number of workers to generate enough tax revenue to pay for the Social Security and Medicare benefits of a growing population of aging boomers.

6) On a personal note I find it frightening that two guys with degrees in physics: Rick Davis and myself seem to be the only people concerned about the data.



The following section is Rick Davis’ work.


During 2Q-2013 consumer expenditures, inventories and imports had significant downward impact on the headline number. The bright spots were fixed investment, government expenditures (federal, state and local) and exports.

For this set of revisions the BEA assumed annualized net aggregate inflation of 0.70%. In contrast, during the first quarter (i.e., from December to March) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) rose by 1.04% (annualized), and the price index published by the Billion Prices Project (BPP) rose at an annualized rate of 1.76%.



As a reminder: an understatement of assumed inflation increases the reported headline number — and in this case the BEA’s relatively low “deflater” boosted the published headline rate. If the CPI-U had been used to convert the “nominal” GDP numbers into “real” numbers, the reported headline growth rate would have been a somewhat lower +1.35%. And if the BPP index (which arguably best reflects the experiences of the American consumer) had be used as the “deflater,” the economy would have been a much more modest +0.63% annualized rate.

Finally, real per capita disposable income reportedly improved by $244 per year and personal savings increased a half percent to 4.5%. The increase in the savings rate came at the expense of consumer expenditures.

Among the notable items in the report:


– The contribution of consumer expenditures for goods to the headline number weakened slightly to 0.79% (down from a revised 0.85%).

– The contribution made by consumer services dropped substantially to 0.43% (from 0.69% revised).

– The growth rate contribution from private fixed investments was increased to 0.93% (up sharply from a revised contraction rate of -0.23% in the previous quarter).

– Inventories were still shown as growing, contributing 0.41% to the headline growth rate (although that number is down from the revised 0.93% rate in the prior quarter).

– The negative impact from governmental contraction has largely abated — dropping to -0.08% from a revised -0.82% in the previous quarter. This stabilization of the negative impact of governmental expenditures on the headline number was spread across all levels and classes of expenditures — although Federal defense spending once again made the most significant change.

– Exports swung into a positive contribution to the overall growth rate, adding +0.71% to the headline number after pulling it down -0.18% in the revised first quarter.

– But once again that good news was more than completely offset by a much larger negative impact from imports — which now subtracted -1.51% from the headline number (after removing only -0.10% in the prior quarter).

– The annualized growth rate of “real final sales of domestic product” improved to 1.27% (up from a drastically revised and meager 0.21% in the previous quarter). This is the BEA’s “bottom line” measurement of the economy — and it remains weaker than the headline number because of the ongoing buildup of inventories.

– And as mentioned above, real per-capita disposable income improved and it is now reported to have increased by an annualized $244 from quarter to quarter.




The Numbers, New and Revised

To see Rick’s data by component please look at this: and scroll down to “BEA’s Revisions to US Economic Growth.”





The new set of numbers for the 2nd quarter of 2013 in fact show weaker growth than previously reported numbers for the 1st quarter, but through the magic of historic revisions the headline (and the press release) can now tout quarter-to-quarter economic improvement — which should excite any markets that are blindly eager for good news, even if that good news is constructed from a revisionist history.


Unfortunately, we can’t ignore a pattern of significant downward revisions to recent past data — suggesting a deeply rooted positive bias in the BEA’s “real time” reporting, including each of the prior four quarters. Even the number published just last month was revised materially downward by -0.64% (i.e., over a third of the previously reported growth has vanished).


And we now find out that the US economy was in contraction during the 1st quarter of 2011. Why are we finding out about that only now?


That last question probably speaks to the mind-set of the BEA (or perhaps their political handlers). Whether intended or not, the BEA’s GDP data clearly does not provide relevant information about the “real-time” economy — and in that regard it has failed both repeatedly and dramatically. And there is nothing to suggest that this current report is meaningfully better.