The Bureau of Economic Analysis (BEA) has released the first estimate of Gross Domestic Product (GDP) for the third quarter (July, Aug, Sept). [DATA HERE] The top line number of two percent GDP growth is significantly worse than most economists and financial pundits expected.
The second quarter GDP was 6.7%, so a slow down to 2% is very significant considering the economy should be rebounding and reopening after the COVID-19 impacts. However, when we dig into the details [Table One] you will see how what is happening in your life is actually reflected in the data. None of this should be a surprise, as the data is simply reflecting what is happening in your personal checkbook economics.
First, here’s the media jaw agape, with false explanations and justifications:
The drop has nothing to do with the ‘delta variant’, and everything -EVERYTHING- to do with inflation and impacts from Joe Biden’s economic policies.
Let’s take a look at the details, and you will see how the national GDP is simply a reflection on what we are doing to survive the Biden economy.
GDP growth is the measure of what is happening inside the U.S. economy. GDP reflects the value of goods and services produced in the U.S. minus the value of goods and services we import from outside the U.S.
Consumer spending represents two-thirds of our overall U.S. economy. When Americans stop buying stuff, our GDP drops.
A few things to remember about the value of goods and services. Inventories are an asset, increases in the inventories of goods we produce is a positive driver of GDP. Those inventories become sales, and those sales are also calculated in the value of goods we build, like houses. Considering how much housing values have increased; and considering how much more value that should add to the GDP overall; when the economy “decelerates”, as housing values increase, that tells you something is profoundly askew.
Consumer spending represents two-thirds of our overall GDP growth. Now take a look at the data in Table-1
Notice what is highlighted? Massive drops in consumer purchases of Goods (-9.2%), specifically in consumer spending for ‘Durable goods’ -26.2%
That statistic should not come as a surprise to those CTH readers who have followed along in the past few months. That statistic is simply a reflection of what we are doing. We are paying so much more for energy, gasoline, fuel, housing and food (all driven by inflation), that we are not spending on durable goods like cars, trucks, or long term appliances, electronics or other non-essential items.
-26.2% in one quarter is a massive contraction in the purchasing of durable goods. However, it should not be a surprise. Overall inflation increased 5.4% in the third quarter as measured within this first estimate analysis of GDP. However, inflation on food and gasoline was more than four to eight times higher, respectively, than overall inflation. As a result, disposable income has collapsed:
“Disposable personal income decreased $29.4 billion, or 0.7 percent, in the third quarter”, according to the top line first analysis. However, again this is a preliminary estimation and reflects a very skewed data point. With inflation on essential items running much higher than wage growth, the -0.7 percent first estimate for personal income is profoundly generous to the Biden administration. We can expect the second estimate in late November -with more complete details- to be a significant downward revision because disposable incomes have dropped much more than -0.7%.
Purchases for durable goods do not drop by 26% with only 0.7% drops in income. Look at your own checkbook economics. All of us blue-collar and working class folks are hunkering down and prioritizing food, fuel and home heating costs. We are not out buying new stuff.
Private residential sales are down 7.7% in the July, August, Sept, period according to the BEA data. Remember when CTH said at a macro level housing prices peaked in the last two weeks of May and first two weeks of June? There’s another supportive data-point.
Yes, there are regional impacts from relocation that are driving home values up in key regions like Florida and some suburban neighborhoods as people flee the crazy. However, overall home values have peaked, and only institutional investors (not families) are purchasing them now. Those institutional investors are buying property because they need tangible assets…. because their paper assets are extremely vulnerable. Vanguard and Blackrock purchasing houses gives them a tangible asset they can then leverage for pennies on the dollar for more low interest loans from the fed. Those houses are then turned into rental incomes feeding the mothership.
Lastly, exports should be a benefit to GDP, but as you can see in Table-1 exports are -2.5%, we are exporting less value in part because the value of our currency has dropped so dramatically.
The bottom line is this. The first estimate of Q3 GDP growth is merely a reflection of what you know is happening in your life and around your neighborhood. The next revision to this data (late November) will be lower than the first estimate because you can see the first estimate has not yet caught up to the current status as it existed in September.