A True Measure of the Economy

From our friends at Consumer Metrics Institute:

November 29, 2012 - BEA Raises 3rd Quarter 2012 GDP Growth Estimate to 2.67%:

In their second estimate of the US GDP for the third quarter of 2012 the Bureau of Economic Analysis (BEA) found that the economy was growing at a 2.67% annualized rate, an upward revision of +0.65% from the previously published first estimate for the quarter.

The improved headline number came exclusively from two sources: substantial upward revisions to inventories and exports. All other components of the growth rate actually weakened -- particularly those associated with consumers. The happy changes to the headline masked the fact that the BEA's bottom line "real final sales of domestic product" fell by nearly a quarter of a percent to 1.90%. Excluding the impact of a huge surge in Federal governmental spending, rising inventories and increasing exports the headline number would have been a mere 1.03%.

The impact of the rise in Federal spending was nontrivial: nominal spending on salaries, materiel and construction grew at an annualized 10.5% rate during the quarter, with nominal defense spending alone growing at an astounding annualized 13.9% rate. This surge in public spending could have been either an organic attempt by the defense establishment to stockpile materiel prior to the "fiscal cliff" or a more politically motivated "stealth stimulus" by the Administration. In either case the stimulus was accomplished without much in the way of public debate or fiscal transparency.

-- Real per-capita disposable income was down $25 during the quarter (to $32,686 per year). This is down $78 from the $32,764 reported for the 1st quarter of 2011, now some 6 quarters ago. The reported annualized contraction rate of -0.31% benefits from the relatively low deflaters used by the BEA. If per-capita disposable income were "deflated" using the BLS CPI-U (which presumably is what consumers actually experience when spending their incomes) the annualized contraction rate for per capita consumer spending power is more like -3.70%.


This report's headline number substantially misrepresents the state of the domestic economy, particularly the consumer portion of that economy. Removing the impact of the Federal spending surge, growing inventories and exports removes nearly two-thirds of the apparent growth. If that remaining growth is then deflated using BLS inflation data, the consumer portion of the economy is actually shrinking at an annualized rate in excess of -1.0%.

We would like to think that the economy is indeed growing at nearly 3% -- which by all rights it should be nearly four years into a purported "recovery." Unfortunately, the underlying reality (especially for US consumers and wage earners) seems to point in a different direction. 

My view:

A graph of the results illustrates the numbers more concretely: