2nd Quarter U.S. GDP — OK not Great. New Reporting on What’s Counted Questionable

Wardwell Market Report 7/31/13

Second quarter 2013 U.S. Gross Domestic Product (GDP) growth came in at 1.7% (flash estimate) better than the 1%-ish growth some feared . . . but first quarter growth was revised down from 1.8% to 1.1%, so first-half growth is not surprising on the upside, despite the decent second quarter report.

  • Personal consumption expenditure growth was weaker than typical, holding growth down.
  • Nonresidential investment, residential investment, and business inventories were fine.
  • The trade deficit (a small increase) and government (essentially flat after two quarters of being a drag) were small numbers.

Tax Hikes are Hurting the Consumer . . . With Lower Savings the Most Visible Result

Over the past 12 months, wage and salary income is up roughly 3%, but tax increases (higher tax rates and the resumption of collecting social security taxes) cut the growth in after-tax disposable income to 1.8%. Personal outlays rose 2.9%, with the gap funded by a 17% reduction in savings.

Data Revisions Both Historic and Recent

A revision of the government’s definition of GDP, most notably the counting of research and development spending as investment rather than expense, and counting pension benefits as they are accrued, rather than paid out, boosted historical GDP growth modestly (without changing the pattern dramatically); the higher growth path resulted in 2012 GDP being roughly 3.5% larger than previously reported (but again, this isn’t really faster growth — it’s a change in what is being counted).

The normal data revisions (as more precise data comes in, prior estimates are revised) resulted in 2012 growth being revised up from 2.2% to 2.8% (stronger first quarter, weaker in the final 3 quarters). 2011 growth remained at 1.8%, but Q1 was revised down from a -0.1% to -1.3% . . . the other three quarters were revised up.

The new treatment of pensions (counting accruals, not payments) boosted historical personal income (because benefits are being earned faster than they’re being paid out while the baby boomers still work) and thus the savings rate. Over the past decade, the reported savings rate was increased by roughly one percentage point . . . the savings taking the form of expected future benefits, not cash in the bank.

While this seems to make sense (pay me now or pay me later), it seems to me that when boomers retire and payouts exceed accruals, this will reverse, becoming a drag on future GDP. Further, if there’s a corporate bankruptcy and pension benefits are lower than had been accrued—or a troubled municipality cuts benefits (as Detroit is trying to do) — this treatment suggests that GDP may take a hit.

Source: Pioneer Investments and Bureau of Economic Analysis GDP Report dated 7/31/13.

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