Because of the BEA’s annual adjustment of prior periods in 1Q2014, I want to ignore the 1Q2014 contraction in GDP and inflation-adjusted GDP. There are just too many measures out there to discount Nominal GDP that confuses many of us who really want to know what is truly happening to our spend of US dollars. This post is for Mainstream America, so I plan to illustrate the Change in Nominal 2Q2014 GDP from 4Q2013 GDP in order to see where we have gone so far in 2014 without the “Hocus Pocus.”
The 6.2% change in 2Q2014 GDP is an anomaly since the 1Q2014 contraction was weather-related and the BEA’s annual adjustment impacted prior periods. I have been wondering if the weather had any impact on the BEA’s data sources for 1Q2014 GDP. In any event, after recovering nicely in 2Q2014, where do we stand in comparison to 4Q2013?
Let’s first take a look at the four major components of GDP, and then, in a future post this weekend, take a deeper dive into the major categories of each with an assessment of current 2014 growth and the prospects of future growth.
Personal Consumption Expenditures (PCE) contributed a whopping 92% of GDP growth. The collective sum of Gross Private Domestic Investment (GDPI), Government Expenditures and Net Exports contributed a net 8%. Of course, GDPI and Net Exports actually contributed 38% and (38%) respectively, but when combined, had no impact on GDP growth.
Can you see how analysts, economists and especially the Media can present the data in various ways? PCE’s 92% impact on GDP is a bit misleading. We could look at this another way: 1) PCE and Net Exports combine to contribute 54% to GDP, while 2) GDPI and Government Spending combined to contribute 46% to GDP. It is not significant as Headline material, is it? The Media blows everything out of proportion to sell news. Be careful in using only some of the data because there is “the rest of the story.”
The bottom line is this: PCE and GDPI continue to have a major impact on GDP growth, while Government Spending remains level in its spending and Net Exports is expanding its drain on GDP. From a Macro level standpoint, 2014 has been a good year so far based on recent historical levels. It is reflected in the Stock Market with the S&P 500 hitting 2000 in its record-setting pace. However, there is not a lot of shares changing hands and stock market activity is moving at a crawl, similar to the slowing pace of growth in our economy.
The change in Real GDP is another story or two depending on which GDP deflator is in use. The Feds keep changing the methods of accounting for inflation. In fact, the annual cost of living increase has negatively impacted Social Security recipients due to a change in its calculation. Although this helps the Government in reducing its Debt levels, it will also negatively impact Income and reduce PCE over the long-term. Is this a sacrifice we all have to pay in order to recover from this Debt Crisis?
In years to come, the droves of Retirees will be affected by this one change and will have less income to spend on goods and services. Will it have a positive impact of keeping the elderly in jobs longer improving the Labor Participation Rate? How will it impact the other social programs for the needy and those who cannot work? Congress has some tough decisions to make in the New Normal, a major structural change in the US Economy.
We will be preparing a Mind Map of the 6-Month Change in US GDP through YTD June before Labor Day. It will include some key economic indicators updated through July/Aug, but most of the August data will not be available. A Final Mind Map will be published after Sept 26th when the 3rd and Final Estimate of 2Q2014 is announced.
Net exports spurs the 0.2% change from the Advance Estimate of 2Q2014 GDP. Every other major component stayed somewhat level with their Advance Estimate.
Outlined below is the BEA’s summary of the categories within each of the 4 major components of GDP. Click on the image to read the data.
As you can see, Gross Private Investment contributed only 0.07% of the change between the Advance and Second Estimates in 2Q2014, while Government Spending contracted 0.03%. Personal Consumption remained level at a 1.69% contribution to GDP. The net contribution of 0.04% from these 3 major components, combined with the 0.18% improvement in Net Exports accounted for the 0.2% increase between the two estimates.
We will be delving more into the change between the 2.1% contraction in 1Q2014 and the 4.2% growth in 2Q2014, a net 2% growth for the 1st half of the year, during the long Labor Day weekend. As stated in prior posts, it appears the US Economy has been slowing down in certain sectors, especially the Housing Market. On the flip side, Durable Goods rebounded in July after seeing a contraction in June, but has seen growth in 5 of the last 6 months. It will be interesting to see where the economy is slowing down growth to an estimated 3% for 3Q2014.
For now, you can view Doug Short’s and Steve Hansen’s great summary at EconIntersect for a more detailed analysis of 2Q2014 activity.
The Big 4 Leading Economic Index (LEI) appears to be making its downturn. If you look inside the 4 individual components, only Industrial Production showed reasonable growth last month. Although the last 6 months averaged positive growth, a mere 0.2% growth or less (2.4% per year or less) was logged in 4 of the last 6 months. Still, a positive LEI indicates no recession is in sight for the next 6-months in the US.
My main concern is that February and March 2014 average LEI growth are the only months that exceeded 0.5%, or 6% annualized growth over the last year. Are we producing more goods and services than what consumers will buy in the near future? It looks that way to me, but I hope I’m wrong!
We need a surge in Consumer Spending during the Back-to-School Sales in August/September, and in the 4th Quarter Holiday Season to right-size the ship! It would be nice if Corporations would begin to hire more full-time, instead of part-time employees, but that won’t happen during the Holiday Season.
For a more detailed analysis of The Big 4 LEI Index, see Doug Short’s most recent post on Real Retail Sales and Industrial Production.
@KeithEOuellette: This week’s key economic signals were mixed and our rating came in neutral, but we are still showing a positive trend for the 3Q2014. The key is to align the economic news items with the weighted average to determine their impact on GDP. We have done just that in estimating GDP growth, utilizing our simple rating model.
For an explanation of the ratings, please refer to the post describing the Rating System.
FINAL SUMMARY OF 3Q2014 RATINGS
POSITIVE = 9
NEUTRAL = 10
NEGATIVE = 6
As of August 22, 2014
- July Industrial Production growth accelerates with its manufacturing component leading the way at 1% mo-over-mo. http://t.co/QKFA5xg2tT
RATING = 2
- Conference Board’s Consumer Confidence Index us hitting record-highs, but August Michigan Consumer Sentiment is at 9-mo. low, breaking the 80 barrier and is now at 79.2 below its 85 average. http://t.co/6F4g17hZfi
RATING = 1
- Is ObamaCare the cause of rising premiums for employers? No, increases are in the normal range prior to ObamaCare. http://t.co/ruftu61fOa
NO RATING FOR OPINIONS
- Will Housing Values deteriorate after QE3? This analysis suggests the glut of homes will bring prices down again. http://t.co/SALqaR0btJ
NO RATING FOR OPINIONS
- Will Commodities continue its fall? Although its value is only 1.2% down since Jan’14, it has fallen 7% in 2-mos. http://t.co/eLHZ1aV78X
RATING = 1
- The Mighty US Dollar has fallen in comparison to other currencies and is considered weak, causing overvalued Markets. http://t.co/D4tKUxE8z4
RATING = 1
- Housing Market Update on Existing Home Sales illustrate that falling household incomes has flatlined applications. http://t.co/GE2rJJPRrk
RATING = <2>
- Here is the real story about the new residential housing market. Mixed signals and a glass half full or empty? http://t.co/ymxp1AaOE2
RATING = 1
- Are Big Mac’s price increases a reliable gauge for measuring inflation? For mainstream Americans, there is no doubt! http://t.co/DnTwJtOqkf
RATING = 1
- July 2014 Real Earnings are again unchanged since July 2013, 13-months later. Will we ever get out of the doldrums? http://t.co/rhYGCRs4sW
RATING = <2>
The pocketbooks of mainstream America and the average Joe have been feeling the effects of inflation since the 1980s. However, the Federal Government says that inflation has been running under 2% per year since then. Who is right? This post is to prove beyond doubt that most of us have less available to spend on our basic needs and wants.
But, first, let’s look at the preferred measure of inflation by the Feds, Personal Consumption Expenditures (PCE) and BLS’ Consumer Price Index (CPI) side by side.
As stated in last week’s post on Slowing PCE, Mainstream Americans have less disposable income to spend for their basic needs and wants. In fact, Consumer Spending on expensive items has contracted, except for automobiles since they have become more of a necessity purchase to replace aged cars to save on excessive repair costs. The Feds near-zero interest rate policy since the 2007 recession has flatlined inflation rates, except for food and energy.
Based on the Core PCE and Core CPI inflation rates, they pretty much track with each other except during high interest rate periods, like in the late-1970s. The CPI is clearly more volatile of the 2 inflation measures, which is why the Feds prefer using PCE. In any event, two of the more important components of CPI to Mainstream America are Food and Energy, which are excluded from the Core inflation measures. Why? It’s simply because the Feds can’t control the weather, which makes food prices more volatile, and oil production.
Now, let’s take a look at the components of CPI, the most common measure for inflation.
Depending on where you are in your life, inflation rates vary dramatically by each CPI component. Households with college-bound kids are more likely to be negatively impacted by the excessively high tuition costs, than the Elderly. On the flip side of the coin, the Elderly will be negatively impacted by rising medical costs and Commuters will be affected by rising gas prices.
For a more detailed analysis of inflation, please look at Doug Short’s post about What a Inflation Means to You. He sums it up nicely for us all stating “Increases in inflation will have a painful effect on lower income households, those on fixed incomes, those with higher ratios of tuition, transportation, or medical costs … and all households whose discretionary spending is more dream than reality.”
What piece of the pie is negatively impacting your pocketbook? What can you do about it? It is time for all of us to prepare for rising interest rates and prices. The question is not “whether it will happen,” but “when will inflation rear its ugly head.”