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GDP Up 6.9% Is Mostly An Artificially Boosted Illusion

The advance GDP estimate for the 4th quarter of 2021 looks robust but details reveal otherwise.
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Real GDP, Data From BEA. Chart by Mish 

Real GDP, Data From BEA. Chart by Mish 

The BEA's advance estimate of Gross Domestic Product for the Fourth Quarter of 2021 is 6.9% at a Seasonally-Adjusted Annualized Rate (SAAR). 

The advance estimate is preliminary and will be revised at least twice. 

BEA Comments 

The increase in real GDP primarily reflected increases in private inventory investment, exports, personal consumption expenditures (PCE), and nonresidential fixed investment that were partly offset by decreases in both federal and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The price index for gross domestic purchases increased 6.9 percent in the fourth quarter, compared with an increase of 5.6 percent in the third quarter (table 4). The PCE price index increased6.5 percent, compared with an increase of 5.3 percent. Excluding food and energy prices, the PCE price index increased 4.9 percent, compared with an increase of 4.6 percent.

Real GDP for the year increased 5.7 percent in 2021 (from the 2020 annual level to the 2021 annual level), in contrast to a decrease of 3.4 percent in 2020. The increase in real GDP in 2021 reflected increases in all major subcomponents, led by PCE, nonresidential fixed investment, exports, residential fixed investment, and private inventory investment. Imports increased  

The price index for gross domestic purchases increased 3.9 percent in 2021, compared with an increase of 1.2 percent in 2020 (table 4). Similarly, the PCE price index increased 3.9 percent, compared with an increase of 1.2 percent. Excluding food and energy prices, the PCE price index increased 3.3 percent, compared with an increase of 1.4 percent.

Price Index 

Please note that last paragraph. Does anyone believe prices for 2021 only increased 3.9 percent? 

Real GDP means inflation-adjusted, and the BEA says inflation was only 3.9%. 

Inventory Adjustments 

Change in Private Inventories (CIPI) added a whopping 4.9 percentage points to real GDP in the fourth quarter. Since inventories net to zero over time, the true bottom-line estimate of real GDP was 2.0%. 

For the third quarter, CIPI added 2.20 percentage points to real GDP. 

Thus, of the reported 2.3% GDP gain for the third quarter, nearly the entire rise was an inventory adjustment. 

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I commented on this inventory build in advance. 

For details, please see 4th-Quarter GDP Will Be Extremely Distorted Due to Monstrous Inventory Build

Warning! Ignore the headline 4th-quarter GDP number and look at the fine print.

Consumer Metrics Assessment 

Rick Davis at the Consumer Metrics Institute pinged my with his thoughts on 4th-quarter GDP.

  • Over 70% of the headline number, 4.90 percentage points came from growing inventories, while arguably another 25% came from underestimated inflation. 
  • The growth rate for consumer spending on goods was a meager 0.13 percent, and spending on consumer services was reported to be a modest 2.12 percent, down 1.45 percentage points from the prior quarter. 
  • Real per-capita annualized disposable income was reported to have decreased by $740 quarter to quarter. 
  • The annualized household savings rate was 7.4%, down 2.1 percentage points from the prior quarter.
  • In the 54 quarters since 2008-Q2, the cumulative annualized growth rate for real per capita disposable income has been 1.35 percent.
  • Every now and then the BEA's headline number wildly misrepresents the state of the economy. This is one of those times. Politicians will gladly cite the headline as proof of a healthy and growing economy. The truth is far murkier. 

Retail Sales Unexpectedly Flop in December, Down 1.9 Percent

On January 14, I noted Retail Sales Unexpectedly Flop in December, Down 1.9 Percent

Holiday shopping was a big flop in 2021, even nonstore retailers were down a whopping 8.7%.

Unexpected Flop

The Bloomberg Econoday consensus was for December retail sales to be flat from November, in a range of -0.6% to +0.7%.

Economists missed the mark by a mile as the Census Data shows sales fell 1.9%.

Adding insult to injury, the Census Department revised November to the downside. 

Businesses are stocking up but consumers are failed to show up and inflation is raging. Gee, what can possibly go wrong with this scenario?

This seemingly great-looking GDP report was actually quite weak. 

If retail sales in 2022 do not match the two consecutive quarter inventory build, we will see very low or perhaps even negative numbers in the coming GDP reports.   

Mish