First-Quarter GDP: Way Worse Than It Looks
First-quarter GDP came in at an annualized rate of 2.5% this morning, which is not terrible as growth goes these days (Japan and most of the eurozone countries would love to be doing that well). But dig a little deeper and the picture gets darker. Here's a summary from the Consumer Metrics Institute, which has been predicting a return to recession in the coming year:
"In their first estimate of the US GDP for the first quarter of 2013, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a 2.50% annualized rate, some 2.12% better than the 0.38% growth rate for the prior quarter.
Although the headline number itself indicates moderate mid-cycle growth, the details within the BEA's report cast at best a mixed message for the overall health of the economy. For example: although the overall contribution from consumer spending was up, it came mainly from spending on services (boosting the headline number by 1.46%, and principally spent on non-discretionary rents and utilities), with consumer spending for goods contributing to the headline number at a more modest 0.78% (down about -0.24% from the prior quarter). And although fixed investments were still contributing a positive 0.53% to the headline number, that was down over a full percent from the prior quarter. In fact, inventories swinging back to growth (after contracting during the prior quarter) arguably provided all of the quarter-to-quarter improvement in the headline growth rate.
For this set of revisions the BEA assumed annualized net aggregate inflation of 1.20%. In contrast, during the first quarter the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) recorded a 2.10% annualized inflation rate. As a reminder: an understatement of assumed inflation increases the reported headline number -- and in this case the BEA's relatively low "deflater" (nearly a full percent below the CPI-U) 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 much more modest 1.63%.
Finally, one of the bright spots in the prior quarter's data (the previously reported substantial improvements in real per capita disposable income) completely reversed in this report -- confirming that the fourth quarter's upward surge in real per capita disposable income was merely an artifact of payroll "gaming" in anticipation of increasing tax rates. In fact, real per capita disposable income contracted during the quarter at an astonishing -5.88% annualized rate -- crashing back to levels that are below where they were two years ago. And, as expected, consumers offset the "new" FICA rate increase of 2% by reducing their savings rate by -2.1%. Although this arguably propped up consumer spending during the quarter, it is important to note that that spending support came in spite of a sharp contraction in sustainable household incomes.
To summarize, disposable income was pumped up going into the November elections and then collapsed once the votes were counted (which should surprise exactly no-one, since that's how the party in power always plays it). So today's positive GDP number came from fudged inflation assumptions and consumers spending pretty much all they made. This is consistent with reports that private sector debt is rising again after a couple of years of shrinkage. It's also consistent with the projection of slower and maybe negative growth for the rest of the year. Which, in turn, is consistent with the idea that quantitative easing can never end, because the minute it does the economy - already struggling despite $85 billion a month in new money creation - will implode.