Taking Apart Robust GDP Data

Q4 GDP came in at a robust +3.5% (versus 3.0% consensus). Let’s take a look at the individual components to see what we can glean from the data:

Personal consumption expenditures: +4.4%
Gross private domestic investment: -11%
Exports: +10%
Imports: -3.2%
Government consumption expenditures and gross investment: +3.7%


 Chart courtesy of Barron’s/Econoday


A few things stood out to me in this advance run (there are 2 subsequent revisions to GDP);

1) Consumers continue to spend money at a faster rate (4.4%) than their income is growing (3.5%). That may be unsustainable, but determining when it hits home is a mere guess. (obviously spending more than your income increases ain’t gonna help the household savings rate none either).

2) Residential housing remains the biggest drag on GDP; Non residential investment has picked up some of the slack from Housing, but it too is trending downward: The past few Qs have been 20.3% (Q2), 15.7% (Q3), 2.8% (Q4). Will office and mall construction follow housing? That certainly seems possible.

3) It is quite surpising to see consumer spending increase as imports drop, as we are , after all, an import loving nation. That suggests one number or the other is a likely revision candidate. 

Now, you may not be surprised to see this sort of chatter from me or the even more bearish Nouriel Roubini. However, you should be surprised to see it from level-headed columnists like Bloomberg’s Caroline Baum, and even more shocked to see it from the generally bullish Tony Crescenzi of Miller Tabak, and author of The Strategic Bond Investor.  He observed:

"I don’t mean to discredit the fourth-quarter gain completely, and I have been upbeat about growth, but the reported gain must be watered down to some degree. Let’s take a look at each of the four factors listed above and how we can interpret the data."

Crescenzi notes that business spending fell during the quarter — equipment and software dropped 1.8%, the 2nd decline in three quarters and the largest since Q4 2002. That’s consistent with the contraction in the Chicago PMI, suggesting the U.S. manufacturing sector is still decellerating.

The residential spending figure was called "sobering" — "it subtracted 1.2 points from GDP, and fell for a fifth consecutive quarter, by 19.2%. That follows decreases of 18.7% in the third quarter and 11.1% in the second quarter. The fourth-quarter decline was the highest since 1991…"

Also of note: The relatively large contribution from the government sector. Spending increased 3.7%, with Uncle Sam spending  4.5% more, largely due to an 11.9% spike in defense spending. State and local spending increased 3.3%. Government added 0.7% of the Q4 GDP gains.

Where Tony really surprised me, however, was his take on personal spending. 

"On the surface, the figure looks solid, increasing 4.4%. The problem, however, is that it reflects a gain of just 3.6% in nominal spending because the personal consumption deflator fell 0.8%, its first decrease since 1961 and the largest decline since 1954, according to Market News.

This means that if the inflation rate for the quarter were at a normal level, say, up 2.0%, personal spending would have seen a very small gain of just 1.6% for the quarter. (I get this by subtracting 2.0% from 3.6%.)

The low level of nominal spending, which was the weakest in four years, reflects strain on the consumer. This figure represents the total amount of money that consumers spent during the quarter, a tally that looked good only because they caught a break with the decline in energy costs. Had energy costs increased, it would have produced a much different result. For context, nominal spending in the overall economy has increased at a pace of 5.6%; it increased at a pace of 5.0% in the fourth quarter."


The bottom line: A good number, but with some hair on it, likely benefiting from warmer weather, government spending, decreased energy prices — but also likely subject to further revisions.



BEA, January 31, 2007  (PDF)

Q4 GDP Growth at 3.5%: What It Means and What It Implies for 2007
Nouriel Roubini
RGE, Jan 31, 2007

Taking Apart the Tainted GDP Data
Tony Crescenzi
RealMoney.com, 1/31/2007 12:52 PM EST

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What's been said:

Discussions found on the web:
  1. OkieLawyer commented on Feb 1

    Consumers continue to spend money at a faster rate (4.4%) than their income is growing (3.5%). That may be unsustainable, but determining when it hits home is a mere guess. (obviously spending more than your income increases ain’t gonna help the household savings rate none either).

    How long can this continue?

  2. Eclectic commented on Feb 1


    Naw, from what I see a-drivin’ ‘roun town, I jiss don’t seemda thankass riite.

    No strain yet in consumption. There might be in the future, but none now.

    And, maybe we should be just so thankful that there isn’t any strain.

    When we conserve, manage, plan, coordinate, economize and strive to make reasonable economic choices and decisions, an economy still depends to a degree on others not doing the same.

    It is the first and most important principle of economics that individuals, when informed, work for their own best interests; unfortunately, it is also true that if everyone suddenly does, it usually portends a looming economic disaster.

    Mr. Bernanke’s last discussion of the coming income needs of the aging, with the obvious shortfalls that are likely to be-fall them, and about their potential for extending their career ages; both these things are perfect indicators of mass failure among market participants to be informed… or their denial of its consequences.

  3. alexd commented on Feb 1

    I would like to add an observation.

    Now that the usuary laws are gone and seemingly forgoton I think we need to look at another scenerio.

    It seems to me that the same peoplpe who find themselves in dire straits with their mortgages likley have another situation. The interest rates on most credit cards now go to rates that are a banker’s wet dream. If people walk from their homes, are they not going to walk from a debt that is increasing at 28%. Then down the pike when they want to get any type of credit they will, if they can obtain any credit , get loans starting at the former rate. Without commenting on the situation’s ethics it seems to me this is going to be a further drag on spending from the lower middle class.

    This is like killing off a large portion of plankton in the ocean. The fish that eat it , starve, then the fish that eat them starve, until we get to the point where the people who eat the fish have nothing.

    I think we should all live in South America for a while and see what it is like to live with a large number of poor, a very small middle class and a powerfull monied class.

    It seems forces in motion might be pushing us there.

  4. lurker commented on Feb 1

    not to worry Alex, we will have a currency to match our new banana republic status…thanks to the frantic printing at the Fed. IMHO.

  5. Josh commented on Feb 1

    How about the slew of comments about Bernanke compared to the first half of last year. He’s the man that now can do no wrong.

  6. Fred commented on Feb 1

    “The bottom line: A good number, but with some hair on it”

    Yes…that’s why it’s call a “soft LANDING”!

    This was a balanced, pragmatic post from you Barry. Thanks for including the ubber sharp Tony C’s work.

    When you combine the Beige Book comments, the language from the Fed yesterday, and these “ok” numbers, I see a continuation of frustration for the majority who are rooting for a (meaningful) stock market correction.

    By “majority” I mean all the bearsish and neutral investors…they typically have more cash (at best) and short/neutral (at worst).

  7. Banker commented on Feb 1

    I see these numbers continuing to sugest no change in rates for the next 3-6 mths. Judging from the Fed Funds contracts the market is seeing things the same way. I think it is to early to talk about a soft landing, but so far things are looking good. Inflation under control and steady solid growth.

  8. OkieLawyer commented on Feb 1


    I think we should all live in South America for a while and see what it is like to live with a large number of poor, a very small middle class and a powerfull monied class.

    It seems forces in motion might be pushing us there.

    Your comment sounds like my post The Shape of Wealth.

  9. Philippe commented on Feb 1

    The real issue is how much credibility has to be given to the central banks be it European or US?
    They dress numbers in accordance with their erring in monetary policies, which are making about face in one-year time.
    They involve the private markets,and are building a solid foundation of distrust.

  10. BDG123 commented on Feb 1

    I loved that private investment number. It was awesome! That is, if one doesn’t worry about reality. That GDP report was…..well….fine other than the fact that we didn’t buy any imports and the private investment number fell off of a cliff. Hey, that signals great times ahead.

  11. Idaho_Spud commented on Feb 1

    Consumers and govt keeping the GDP high by spending money they don’t have. Looks rosy to me, Kudlow and banker. But then I have a soft spot for sockpuppets…

    Rock on, no worries, soft landing! LOL.

  12. Craig commented on Feb 1

    How long do we give the bond guys before they see the light and start raising short term rates?
    What do you suppose that will do to equities? And then the fed? And then the $? And gold?

    Why is gold going higher? What does it say?

  13. SF commented on Feb 1

    The following are some highlights from Table 2 (“Contributions to Percent Change in Real GDP”, i.e., Newbies: how much they added or subtracted to the number we got today.)

    Added: (consumer, government, trade gap)

    Consumer: 3.05

    The stand-out of Consumer spending:
    Non-Durables: 1.38
    Stand-out in Non-Durables:
    Food: .69

    All government: .70
    Stand-out in government spending:
    Defense .53

    Exports: 1.08

    *Imports: .56

    Imports are a detractor to GDP. In today’s release, they decreased, thus boosting GDP.

    That’s the good stuff, now here’s the highlights of the negatives:

    Subtracted: (housing, inventories)

    Fixed Investment: -1.21
    Stand-out in fixed investment:
    Residential: -1.16

    **Inventories: -.71%

    ** Building inventories is a GDP positive. In today’s release we saw a plunge in inventory investment from Q3’s $55.4 bil to $35.3 bil. Thus inventory investment was a drag in Q4.

    Final Sales (demand indicator): +4.2%. This is vs.+1.9% in Q3.

    Here’s my favorite, the Implicit Price Deflator (Newbies: backed out of nominal GDP to get to the “real” or inflation-adjusted flavor. The lower they keep this deflator, the stronger GDP will appear.):


    Q1 3.3
    Q2 3.3
    Q3 1.9
    Q4 1.5

    So with nominal growth at 5% in the Q, backing out the 1.5% deflator, you get the +3.5% headline.

    Bottomline: If you take this crock at face value, such strong consumption will give rise to resurrecting the “I” word again. So take a nothin’ done on any rate cuts any time soon. Additionally, if the FOMC is payin’ attention and not just havin’ another food fight behind those closed, mahogany doors, well, then, the communiqué should wax hawkish today. Don’t say you ain’t been warned.

  14. Gary commented on Feb 1

    Yesterdays rally may just be the final straw to push sentiment over the top bullish. BTW 80% of the time after a rally on the Fed meeting the market is down 1% or better within 2 weeks. Still looks like typical euphoria topping action to me from a very long bull market. Anybody check out FXI lately. Looks like China is following in the same footsteps as us in 2000. My guess is that is where the first crack will appear.

  15. LAWMAN commented on Feb 1

    Guys, its time to take off the smoke-colored glasses. While you are waiting for the sky to fall, I’m going to go make some money in the market.

  16. lurker commented on Feb 1

    spot on Gary. I think you are correct sir.

  17. Craig commented on Feb 1

    No one has glasses.
    They simply mistake bottom up analysis with top down.

    The top down folks will run like crazy until the floor drops out from under them.
    The delay is normal, either way. Either bears sit out a bit of a rally or bulls run off a cliff. See? DELAY.

    So bulls, Run run run!

    We can’t get to a correction without you.
    For animals that need each other so much we sure do misunderstand one another.

    We are all just waiting our turn. Over 900 days is a long time.

    Pretty soon salmon will jump right into our mouths. In the meantime RUN!
    We’ll be waiting for you at the bottom.

  18. Gary commented on Feb 1

    Excellent analogy. Bulls and bears both seem to think that the market will continue indefinitly in their direction. Markets absolutely must exhale just like people do. The only problem is when we go to far in one direction then the reaction tends to be just has great in the other direction. We saw that from 2000-2002. China is setting up to find out soon and the US markets are going down the same road all over again. We didn’t learn a thing.

  19. Estragon commented on Feb 1

    I think there’s a danger in taking the bull/bear thing too far.

    Markets are often described in sports or military terms, with a bull team and a bear team. This makes good copy, but the analogy is inappropriate in that few market participants are either fully bullish or fully bearish in outlook, and even those who are playing exclusively for one “team” will manifest that belief differently.

    I don’t agree that “Bulls and bears both seem to think that the market will continue indefinitly in their direction”. There seems to be a growing unease and a recognition that a trend change is overdue, but to act on that recognition prematurely risks underperformance. Nobody wants to leave a really good party early.

  20. Craig commented on Feb 1

    A better analogy might be fear and greed.

    Greed is a strong emotion and with a crowd of like minded people may develop into a mob. BUT the mob, although worked up, won’t react as strongly in greed as they will with fear. Once fear strikes it is hard to stop the momentum. AAMOF, fear will stop greed in it’s tracks. It takes more time for greed to overcome and stop fear. Those that master these emotions of course make more money than those who don’t/can’t.

    The other part of course is the element of surprise. Going up there is little surprise, but once we get at or near the top anything can happen to set off fear.

    Since the new word isn’t “Goldilocks” anymore, but “Nirvana”, I would say it’s a good a place as any to get off the train.
    Next stop, Nirvana!

  21. Fred commented on Feb 1

    No one believes the market will go up from here (without a correction — including me).

    What does that tell us?

  22. theroxylandr commented on Feb 1

    Bulls and bears: I have approximately 50/50 long and shorts. Who am I? Which camp will take me? :-)

  23. Craig commented on Feb 1

    A securities trader?

    Or more precisely, a price trader.

  24. Estragon commented on Feb 1

    Craig – fear & greed; While it’s true that fear trumps greed (aka risk aversion) it’s worth noting that the object of the emotion isn’t always obvious.

    For example, you and I, as principals may lust after absolute returns, but fear catastrophic loss of capital. Others, running OPM as agents though, may lust after high relative returns and lower volatility, and fear only underperformance relative to peers. In their case, a catastrophic loss of capital isn’t what scares them. They can afford to ignore the risk of catastrophic loss, particularly if they believe they’re standing close enough to the exit.

    I suspect this is why we’re seeing the price of highly liquid, low volatility assets being bid up. Agents don’t care if the house burns down, or even if they get charred a bit. They just have to be certain to bar the door once they’ve left the building so their peers can’t escape!

  25. Craig commented on Feb 1

    Funny how running your own book enhances the senses.

  26. Andrew commented on Feb 1

    Barry or anyone else: can you explain the significance of the “real change in private inventories” in the GDP report? It took ~0.7% off of the aggregate GDP number, while in Q3 it added ~0.1%. It seems like it would be positive, in that we had real 3.5% GDP growth even in the face of a reduction in private business inventories. Then again, mightn’t it reflect businesses anticipating a drop in demand in, say, 1Q07? Thanks!

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