July 30, 2014 – BEA Reports 2nd Quarter 2014 GDP Growing At 3.94% Annual Rate

In their first estimate of the US GDP for the second quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a +3.94% annualized rate. When compared to the prior quarter, the new measurement is up over 6% from a -2.11% contraction rate for the 1st quarter of 2014 (which was itself revised upward +0.83% from a previously reported -2.94% contraction). This is the largest positive quarter to quarter improvement in GDP growth in some 14 years. 

The largest contributions to the 2nd quarter 2014 +6% turnaround in the headline number were from inventories (+2.8%), exports (+2.5), consumer goods expenditures (+1.2%) and commercial fixed investments (+0.9%). Offsetting those positive quarter-to-quarter contribution changes were deteriorating imports (which weakened by -1.5%) and consumer expenditures for services (down -0.3% quarter-to-quarter). 

Real annualized per-capita disposable income was reported to be $37,449 — up some $284 from the prior quarter (a 3.1% annualized growth rate) but still down $420 from the 4th quarter of 2012. A significant portion of that increased disposable income went into savings, with the savings rate growing to 5.3% — the highest savings level since 4Q-2012. 

For this report the BEA effectively assumed annualized quarterly inflation of 2.00%. During the second quarter (i.e., from April through June) the growth rate of the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was over one and a half percent higher at a 3.53% (annualized) rate, and the price index reported by the Billion Prices Project (BPP — which arguably reflected the real experiences of American households) was three quarters of a percent higher at 2.72%. Under reported inflation will result in overly optimistic growth data, and if the BEA’s numbers were corrected for inflation using the BLS CPI-U the economy would be reported to be growing at a 2.49% annualized rate. If we were to use the BPP data to adjust for inflation, the first quarter’s growth rate would have been 3.30%. 

Separately, the BEA released its annual revision to historical data (dating back to 1999). Average quarterly annualized growth in both 2011 and 2012 was reported to have been somewhat lower than previously reported (by about a third of a percent each year), while average quarterly annualized growth in 2013 was revised upward (by about a half percent). 

Among the notable items in the report : 

— The contribution of consumer expenditures for goods to the headline number was 1.38% (up a substantial 1.15% from the 0.23% contribution now reported for the prior quarter). 

— The contribution made by consumer services spending dropped to 0.31% (down -0.29% from the 0.60% reported for the prior quarter). 

— Commercial private fixed investments provided 0.91% of the headline number (after adding only 0.03% during the prior quarter). 

— The prior quarter’s contraction in inventories reversed — adding 1.66% to the headline growth rate after subtracting -1.16% during the prior quarter. 

— Governmental spending grew, adding 0.30% to the headline after removing -0.15% in the prior quarter. All of that growth was at the state and local levels. 

— Exports are now reported to be adding 1.23% to the headline growth rate after subtracting -1.30% during the first quarter. 

— Imports subtracted -1.85% from the headline number after removing only -0.36% during the prior quarter. 

— The annualized growth rate for the “real final sales of domestic product” is reported to be 2.28% (after contracting at a revised -0.95% in the prior quarter). This is the BEA’s “bottom line” measurement of the economy, and it is lower than the headline number because of the growing inventories. 

— And as mentioned above, real per-capita annual disposable income grew by $284 during the quarter (a 3.09% annualized rate). But real disposable income is still down a material -$420 per year from the fourth quarter of 2012 (before the FICA rates normalized) and it is up only about 2% in total since the second quarter of 2008 — some 6 years ago.