The U.S. Fourth Quarter GDP growth was reported two days ago at 2.6% and that stunned everyone who were expecting a much higher number. All U.S. economic indicators including U.S. Holiday consumer spending, which accounts for around two-thirds of total GDP, were off the charts in the fourth quarter growing +5.5% over the prior holiday.
The total growth in fourth quarter consumer spending was almost four percent (3.8%), that’s the highest rate of consumer spending in well over two years. Q4 investment in new housing increased 11.6%, business spending on equipment surged 11.4% and outlays on structures edged up 1.4%.
Before the BEA (Bureau of Economic Analysis) announcement, everyone predicted 4th quarter GDP growth would easily be over 3%, and most likely in the 3.5 to 4.0% range.
So what gives. Why did the Q4 GDP only grow at 2.6% ?
It seems a little funny to be griping about 2.6% growth because, well, that’s really good, Bigly even; so hopefully those within the Commerce Department don’t take this review personally. But, c’mon, we expected more… Well, the answer to the question is actually in the first few paragraphs of their release, and later in the deep weeds of the data. I’ll explain.
First, the part of the announcement to note carefully:
[…] The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revisionby the source agency (see “Source Data for the Advance Estimate” on page 3). The “second” estimate for the fourth quarter, based on more complete data, will be released on February 28, 2018.
The “source data for the advance estimate” is another set of separate analytical disclaimers (pdf here) which informs users there are economic data-sets that contain ‘less than‘ three months of information. To see what data is missing, and what “assumptions” the BEA recommends, you to travel to a third level of depth (LINK HERE), and then to the key source data and BEA assumptions (excel spreadsheet here).
Don’t try this at home without a pocket protector and guidebook to the fourth level of Dantes inferno. So let me try to make this easy.
You will remember from prior conversations the U.S. GDP is the combined value of all goods and services produced and sold in the U.S. *minus* the value of all imported goods and services.
The value of imported stuff is always subtracted from value of the stuff we generate because the imported stuff doesn’t provide any economic benefit to America.
U.S. GDP is what we produce, minus what we import. That’s important to understand.
The BEA is essentially saying there were massive amounts of imports in the fourth quarter, but they are unable to determine exactly how much that was.
That makes sense because all records for American on-line sales were broken; and a lot of those purchases were probably Chinese (and Asian, or EU) sellers, selling clothes and stuff into the U.S. as you purchased Christmas presents etc.
The BEA has no way of knowing from top-line sales (financial data) how much of the small stuff (clothes, gadgets, etc.) came from outside the U.S…. to your doorstep…. Well, not yet.
Additionally, all the inventories of similar stuff, from U.S. manufacturers and retail sellers, is now wiped out (ie. “low inventory”), and as such – the value of that inventory is gone. It is now in the bank. There is no way of knowing how much that domestic inventory was, as part of the overall record-breaking fourth quarter sales.
So the BEA essentially deduced, ie. guessed, that a massive amount of product value needed to be deducted from U.S. GDP growth.
How much did they deduct?
Without knowing exactly how much of the overall 4th quarter retail sales were from imported products and services, the BEA went with the biggest number they could estimate. The analysis is deep in the weeds on Chart #2 Line #50 (pdf here and below).
I cut it out so you can see:
The 4th quarter import deduction to GDP (goods -1.91%, services -.05%) is the biggest deduction EVER, and potentially, heck, likely, massively over-estimated.
Hence their disclaimer: “The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency.”
Specifically because the BEA made the biggest deduction in their history to the GDP growth rate; and specifically because fourth quarter sales were so historic in scope; we can expect that on February 28th, 2018, when the full rolled-up data is reviewed, there will likely be the biggest revision ever to their 2.6% GDP growth. Initial estimate too low.
If you just use import history as a guide the actual 4th quarter GDP growth will end up at least a full one percent higher. That would put the actual result around 3.6% which is exactly the landscape everyone thought it would be.
To answer the question: Did the BEA sandbag the number? Well, you decide. I think the evidence is clear they have been far too conservative with the estimate.
Addendum: To slightly defend the BEA from criticism, it should be noted that foreign manufacturers (think Samsung) fully anticipated a tough year for them in the face of President Trump’s policies to level trade imbalances. There is actual evidence many Asian companies, specifically Samsung and LE, shipped massive amounts of parts into the U.S. in advance of this year. Commerce Secretary Wilbur Ross spoke to this at Davos.