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A Bad Start To 2Q2014 GDP

The consumer has been adding 2% to GDP growth for the last one-half year. The table below compares the 4Q2013 GDP (Table 1.1.2) with the advance and second estimate 1Q2014 GDP which shows:

  • consumer consumption did not change much between quarters and between the advance and second estimates;
  • trade balance worsened mostly due to declining exports;
  • there was an inventory decline (negative for GDP but positive to the REAL economy);
  • government drag on GDP continues but is less than 4Q2013.

The arrows in the table below show the improvement between the advance and second estimate.

[click on graphic below to enlarge]

Now 2Q2014 (April 2014) personal income expenditures is contracting.

The inflation adjusted income and consumption are "chained", and headline GDP is inflation adjusted. This means the impact to GDP is best understood by looking at the chained numbers. Econintersect believes year-over-year trends are very revealing in understanding economic dynamics.

First, the fact 1Q2014 GDP is negative is not concerning - as it was caused by inventory adjustments which I do not understand why this element is in GDP. GDP should be based solely on final sales - and inventory should not be an element. But one needs to look at the forward dynamics. In a personal consumption based economy - the only element that matters is the consumer,

The graph below illustrates the relationship between income (DPI) and expenditures (PCE) - showing clearly income and expenditures grow at nearly the same rate over time. In dollar terms, expenditures are growing faster than consumer income - and this is not positive for long term economic growth. What happened this month is a snap-back.

Indexed to Jan 2000, Growth of Real Disposable Income (blue line) to Real Expenditures (red line)

The long term trend remains that the consumer is spending more of its income - and this cannot go on indefinitely. .

Seasonally Adjusted Spending's Ratio to Income (a declining ratio means consumer is spending less of its Income)

PCE is the spending of consumers. In the USA, the consumer is the economy. Likewise, personal income is the money consumers earn to spend. Even though most analysts concentrate on personal expenditures because GDP is based on spending, increases in personal income allow consumers the option to spend more.

There is a general correlation of PCE to GDP (PCE is a component of GDP). PCE is a fairly noisy index and subject at times to significant backward revision (see caveats below).

Seasonally and Inflation Adjusted Year-over-Year Change of Personal Consumption Expenditures (blue line) to GDP (red line)

Econintersect and GDP uses the inflation adjusted (chained) numbers. Disposable Personal Income (DPI) is the income after the taxes.

Seasonally & Inflation Adjusted Percent Change From the Previous Month - Personal Disposable Income (red line) and Personal Consumption Expenditures (blue line)

Yet year-over-year growth is not exceptional with both consumption and income below GDP growth - and income growth still lagging consumption.

Seasonally & Inflation Adjusted Year-over-Year Change - Personal Disposable Income (red line) and Personal Consumption Expenditures (blue line)

FRED Graph

The savings rate has been bouncing around - but the general trend is down. In an economy driven by consumers, a higher savings rate does not bode well for increased GDP. This is one reason GDP may not be a good single metric of economic activity. The question remains what is the optimal savings rate for the current demographics. It might be expected that as people near retirement, the savings rate rises and after people retire, savings rate falls. Econintersect is not aware of any study which documents this effect. The graph below is from BEA table 2.6. - and shows a significant fall in savings rate for January 2013 - and now a recovery is continuing. The savings rate is now 4.0% - last month was reported as 3.6% - and remains in a general down trend (saving less) even though the savings rate improved this month.

Personal Savings as a Percentage of Disposable Personal Income

Other Economic News this Week:

The Econintersect Economic Index for June 2014 is showing continued growth acceleration. Outside of our economic forecast - we are worried about the consumer's ability to expand its consumption as the ratio between income and expenditures are near all time highs. The GDP contraction for 1Q2014 is a paper contraction as GDP is determined by playing games with accounts. No serious element of the economy was in contraction (except government spending) which is already expanding in the 2Q2014.

The ECRI WLI growth index value has been weakly in positive territory for many months - but now in a noticeable improvement trend. The index is indicating the economy six month from today will be slightly better than it is today.

Current ECRI WLI Growth Index

Initial unemployment claims went from 326,000 (reported last week) to 300,000 this week. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate. The real gauge - the 4 week moving average - improved marginally from 322,750 (reported last week as 322,500) to 311,500. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.

Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line)

Bankruptcies this Week: Lupatech (Chapter 15)

To view all the economic analysis this week - [click here]

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.