I have been stating that rates were headed downward based entirely on Jim Grauer's technical analysis. Yesterday's GDP data clearly indicated that the economy is soft and, if fact, contracted in the 1stQ2014. This despite QE which has served only the purpose of inflating equities. The story that this was all about weather is not entirely true. This is seasonally adjusted data. It takes into account winter weather.
Rick Davis' account below touches not only on weak GDP but asks the very important question as to why BEA is either unable or unwilling to provide an accurate assessment of this vary important bit of data. No one is holding BEA accountable for the grossly inaccurate data on 1stQ2008 GDP data Rick discusses below. Why should be accept such shoddy work?
In an email exchange of yesterday, Rick discussed some of what is wrong with BEA data gathering:
The key swing, however, is from sharply deteriorating inventories -- i.e., companies appear to be drawing down inventories even faster than the BEA had originally guesstimated (or wanted to admit).
That, in turn, harkens back to the competency issue on several counts:
1) They clearly don't have any "real-time" grasp on inventories. That particular line item has the largest statistical deviation from first to second estimate for any quarter. And it is the most likely line item to change in annual revisions.
2) Their inventory numbers are subject to distortions caused by pricing changes. For many items the data they actually collect is the raw quantity of goods stored (e.g., barrels of oil). The inventory line item, however, is the valuation of those goods. Hence, fluctuating commodity prices can creating changing "inventory levels" from one time period to the next even if the physical quantities of the goods stored does not change. BTW, the "imports" line item suffers from the same source of period-to-period distortion (although in that case somebody is actually paying the higher/lower commodity prices).
3) The whole "inventory line item" is in essence a plugged number that the BEA had to invent to reconcile the differences between production and consumption. Remember, we are talking GD-"P". And the BEA has traditionally found it easier to measure production than consumption (fewer entities to survey). But everyone wants to know the PCE numbers -- i.e., how healthy is the appetite of the American consumer. In theory, inventory change is the difference production and consumption. But somewhere along the line they actually started to survey inventories. And then they discovered that the simple equations (consumption = production +/- inventory change) never balance. They should simply report production and consumption separately and be done with it. The current GDP "speadsheet" is a hopeless mess of apples and oranges, all distorted by deflators (and economists) run amuck.
BTW, the negative impact from inventory draw-downs partially offsets a full year of inventory building that unrealistically boosted GDP in 2013. It is likely to continue for at least the current and next quarters (unless commodity prices take off again -- like early 2013).
All that said, the consumer continues to be squeezed by stagnant disposable income and increasing non-discretionary "services" costs (e.g., Obama-Care, utility and financial (i.e., interest rate) costs). And, in theory, defense expenditures should continue to decline as our "engagement" in central Asia winds down. Not much upside visible from here.
The previous section and all of section V) are from Rick Davis of Consumer Metrics Institute.
V) GDP
In their second estimate of the US GDP for the first quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was contracting at a -0.99% annualized rate. When compared to prior quarters, the new measurement is down over 3.6% from the 2.64% growth rate reported for the 4th quarter of 2013, and it is now more than 5% lower than the 4.19% reported for the 3rd quarter of 2013.
The largest revisions to the headline number were from inventories (revised downward by -1.05%) and imports (down -0.36%), and although exports improved somewhat from the prior report, they still subtracted -0.83% from the headline. Fixed investments in both equipment and residential construction continued to contract. The contraction rate for government spending also deepened slightly, with the downward revisions primarily in state and local governmental infrastructure investment.
Consumer spending was not revised significantly in this report, although the reported household savings rates dropped once again.
The previously reported quarterly growth in real annualized per-capita disposable income was revised downward to $95 (and that disposable income figure is now $227 per year lower than it was during the fourth quarter of 2012), while the household savings rate shrank again to 4.0% (down -0.9% from the 4.9% in the prior quarter and down -2.6% from the fourth quarter of 2012).
And lastly, for this report the BEA assumed annualized net aggregate inflation of 1.28%. During the first quarter (i.e., from January through March) the growth rate of the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was over a half percent higher at a 1.80% (annualized) rate, and the price index reported by the Billion Prices Project (BPP -- which arguably reflected the real experiences of American households while recording sharply increasing consumer prices during the first quarter) was over two and a half percent higher at 3.91%. Under reported inflation will result in overly optimistic growth data, and if the BEA's numbers were corrected for inflation using the BLS CPI-U the economy would be reported to be contracting at a -1.52% annualized rate. If we were to use the BPP data to adjust for inflation, the first quarter's contraction rate would have been a staggering -3.64%.
Among the notable items in the report :
-- The contribution of consumer expenditures for goods to the headline number actually increased to 0.16% (still down a substantial -0.50% from the 0.66% contribution in the prior quarter).
-- The contribution made by consumer services spending remained essentially the same at 1.93% (up 0.36% from the 1.57% in the prior quarter). As mentioned last month, the increased spending was primarily for non-discretionary healthcare, housing, utilities and financial services -- i.e., increased expenses that stress households without providing any perceived improvement to their quality of life.
-- Commercial private fixed investments contracted, reducing the headline number by -0.36% (after adding 0.43% during the prior quarter). The contraction was led by reduced outlays for IT equipment, transportation equipment and residential construction.
-- Inventories are now reported to be contracting substantially more sharply -- subtracting -1.62% from the headline growth rate (down -1.60% from the prior quarter).
-- Reduced governmental spending removed an aggregate -0.15% from the headline number. The Federal government "shutdown" is now in the prior reporting quarter (i.e., 4Q-2013), and a modest bounce-back in Federal non-defense spending added 0.2% to headline number that was more than offset by contracting defense spending and shrinking state and local infrastructure investments.
-- Exports subtracted -0.83% from the headline number (a change of -2.06% from the fourth quarter). Export growth had been one of the bright spots of 2013 -- even as the economies of many of our trading partners softened. That source of growth has ended.
-- Imports subtracted -0.12% from the headline number (after adding 0.24% in the prior estimate).
-- The annualized growth rate for the "real final sales of domestic product" dropped slightly to 0.63% (still down over 2% from the 2.66% in the prior quarter). This is the BEA's "bottom line" measurement of the economy -- and it remains substantially stronger than the headline number because of the sharp contraction in inventories.
-- And as mentioned above, real per-capita annual disposable income grew by $95 during the quarter (a 1.03% annualized rate). But that number is down a material -$227 per year from the fourth quarter of 2012 (before the FICA rates normalized) and it is up only about 1% in total ($359 per year) since the second quarter of 2008 -- some 23 quarters ago.
The Numbers, As Revised
As a quick reminder, the classic definition of the GDP can be summarized with the following equation :
or, as it is commonly expressed in algebraic shorthand :
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) | $17.1 | = | $11.8 | + | $2.7 | + | $3.1 | + | $-0.5 |
| % of GDP | 100.0% | = | 69.0% | + | 15.8% | + | 18.2% | + | -2.9% |
| Contribution to GDP Growth % | -0.99% | = | 2.09% | + | -1.98% | + | -0.15% | + | -0.95% |
Quarterly Changes in % Contributions to GDP
| 1Q-2014 | 4Q-2013 | 3Q-2013 | 2Q-2013 | 1Q-2013 | 4Q-2012 | 3Q-2012 | 2Q-2012 | 1Q-2012 | 4Q-2011 | 3Q-2011 | 2Q-2011 | 1Q-2011 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total GDP Growth | -0.99% | 2.64% | 4.12% | 2.48% | 1.14% | 0.14% | 2.78% | 1.20% | 3.71% | 4.86% | 1.37% | 3.19% | -1.29% |
| Consumer Goods | 0.16% | 0.66% | 1.03% | 0.71% | 0.85% | 0.85% | 0.84% | 0.50% | 1.04% | 1.14% | 0.29% | 0.05% | 0.60% |
| Consumer Services | 1.93% | 1.57% | 0.32% | 0.53% | 0.69% | 0.29% | 0.31% | 0.78% | 0.94% | 0.51% | 1.14% | 0.98% | 0.81% |
| Fixed Investment | -0.36% | 0.43% | 0.89% | 0.96% | -0.23% | 1.63% | 0.39% | 0.68% | 1.21% | 1.39% | 1.96% | 1.16% | -0.05% |
| Inventories | -1.62% | -0.02% | 1.67% | 0.41% | 0.93% | -2.00% | 0.60% | -0.91% | 0.36% | 2.73% | -1.60% | 0.72% | -1.06% |
| Government | -0.15% | -0.99% | 0.08% | -0.07% | -0.82% | -1.31% | 0.67% | 0.05% | -0.28% | -0.31% | -0.52% | -0.25% | -1.61% |
| Exports | -0.83% | 1.23% | 0.52% | 1.04% | -0.18% | 0.15% | 0.05% | 0.51% | 0.56% | 0.38% | 0.92% | 0.64% | 0.48% |
| Imports | -0.12% | -0.24% | -0.39% | -1.10% | -0.10% | 0.53% | -0.08% | -0.41% | -0.12% | -0.98% | -0.82% | -0.11% | -0.46% |
| Real Final Sales | 0.63% | 2.66% | 2.45% | 2.07% | 0.21% | 2.14% | 2.18% | 2.11% | 3.35% | 2.13% | 2.97% | 2.47% | -0.23% |
Summary and Commentary
This is a bad report, and the numbers speak for themselves. And looking at the trend lines, things are unlikely to get better anytime soon.
But we also feel compelled to digress from the bad news itself. While other people may be utterly shocked to find that the economy is in contraction, we are much more inclined outrage at the possibility that the BEA published clearly fictitious numbers last month in an effort to "ease" the readings towards the bad news that they knew (or should have known) would follow shortly :
-- If they (the BEA) did not realize last month that the US economy was in contraction during the first quarter of 2014, they are sufficiently incompetent (in practice and procedure) to merit a complete overhaul and/or gutting of the agency.
-- That said, gross incompetence is probably the lesser evil -- simply because if they knew full well last month how bad the news really had become, they simply descended into a Goebbelesque world of publishing what they wanted the world to think.
-- We wonder who the BEA is supposed to serve? The history texts tell us that the BEA's genesis was in the second Roosevelt administration's frustration at the poor performance of "live" economic data during the Great Depression. Maybe we need someone of FDR's ilk to get really pissed at the quality of the "live" data currently emanating from the BEA. For example, recall how the BEA reported the first quarter of 2008 over time :
BEA's Changing View of First Quarter 2008 GDP
| Reported Growth Rate | Report Date | Months Lag |
|---|---|---|
| +0.6% | April 30, 2008 | 1 |
| +1.0% | June 26, 2008 | 3 |
| -0.7% | July 31, 2009 | 16 |
| -1.8% | July 29, 2011 | 40 |
| -2.7% | July 31, 2013 | 64 |
-- The BEA is not serving anyone particularly well (except perhaps their political masters) with a track record like the above. In "real-time" they overstated the 1Q-2008 growth rate (during an election year) by a staggering +3.3% (and note that in the run-up to the election they initially revised that overstatement even further up). We are hard pressed to find another developed country (except China) reporting economic data on a less timely, accurate or transparent basis.
-- And, is it remotely possible that the pace of economic growth has changed so dramatically in just two quarters -- contracting by over 5% since the 3rd quarter of 2013? Has anyone sensed so catastrophic a change? Or for that matter, did anyone actually sense 4% economic growth in 3Q-2013? We suspect that we will find out (some time from now) that the third and fourth quarters of 2013 were nowhere near as wonderful as they were originally cast.
When reflecting on the BEA we have certainly offered a hard choice: incompetence or Goebbelesque. Sadly, we may be seeing a fair share of both.
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