Taking Inventory: 3Q GDP Estimate Revised Higher

by Rick Davis, Consumer Metrics Institute

In their second estimate of the US GDP for the third quarter of 2015, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a +2.07% annualized rate, up +0.58% from their previous estimate — but still down nearly 2% (-1.85%) from the second quarter.

This report’s headline number was buoyed substantially by a sharp revision in inventories. All of the other line items were either essentially unchanged or weaker. Although inventories are still reported to have been contracting at a -0.59% annualized rate, that is a +0.85% improvement from the -1.44% contraction rate reported in the previous estimate. As we have mentioned a number of times before, the BEA’s treatment of inventories can introduce noise and seriously distort the headline number over short terms — which the BEA admits by also publishing a secondary headline that excludes the impact of inventories. Because of the general weakness in the non-inventory line items, this BEA “bottom line” (their “Real Final Sales of Domestic Product“) was revised downward -0.29% to a +2.66% growth rate for the third quarter, from the +2.93% previously reported.

Consumer activity once again contributed the vast bulk of the headline number (providing +2.05% in total), although that contribution was less than in the previous estimate (down -0.14% in aggregate). Fixed commercial investments and governmental spending were essentially unchanged, while exports and imports weakened materially from the previous estimate.

And in a glimmer of good news, household income was again revised significantly upward. Real annualized per capita disposable income was reported to be $38,260 per annum, up $174 from the previous estimate and now up $293 per year from the prior quarter. The household savings rate was reported to be 5.2% — up substantially from the prior quarter’s 4.7% rate.

For this revision the BEA assumed an annualized deflator of 1.32%. During the same quarter (July 2015 through September 2015) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was slightly negative (dis-inflationary), at -0.37%. Over estimating inflation results in pessimistic growth rates, and if the BEA’s “nominal” data was deflated using CPI-U inflation information the headline number would show a much better +3.78% growth rate.