In their first (“preliminary”) estimate of the US GDP for the third quarter of 2016, the Bureau of Economic Analysis (BEA) reported that the growth rate was +2.91%, up +1.49% from the prior quarter. 

Most of the reported improvement in the headline number came from a +1.77% quarter-to-quarter gain in inventories, a +0.96% rise in exports, and a +0.39% uptick in governmental spending. Offsetting those improvements was an aggregate -1.41% reduction in the headline number from softening consumer spending on both goods and services. Fixed investments remained in contraction at a -0.09% annualized rate. 

The BEA’s treatment of inventories can introduce noise and seriously distort the headline number over short terms — which the BEA admits by also publishing a secondary headline that excludes the impact of inventories. The BEA’s “bottom line” (their “Real Final Sales of Domestic Product”) was a +2.30% growth rate, down -0.28% from 2Q-2016. If we take the BEA’s “bottom line” at face value, economic growth actually softened during the third quarter. 

Real annualized household disposable income was reported to have grown by $127 in this report, to an annualized $39,103 (in 2009 dollars). The household savings rate remained unchanged at 5.7%. 

For this revision the BEA assumed an effective annualized deflator of 1.48%. During the same quarter (July 2016 through September 2016) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was 1.84%. Under estimating inflation results in correspondingly optimistic growth rates, and if the BEA’s “nominal” data was deflated using CPI-U inflation information the headline growth number would have been somewhat lower, at a +2.60% annualized growth rate. 

Among the notable items in the report : 

— The headline contribution from consumer expenditures for goods decreased substantially to a +0.48% growth rate (down a material -1.03% from the prior quarter). 

— The contribution to the headline from consumer spending on services also went down to +0.99% (down -0.38% from the prior quarter). The combined consumer contribution to the headline number was +1.47%, down a significant -1.41% (nearly half) from 2Q-2016. 

— The headline contribution from commercial private fixed investments remained negative at -0.09%. Although this is up +0.09% from the previous quarter, it represents the fourth consecutive quarter of contraction in commercial fixed investments. 

— The contribution from inventories flipped to a positive number in this report, adding 0.61% (up a dramatic +1.77% from 2Q-2016 — after a string of five consecutive quarters of contraction). It is important to remember that the BEA’s inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity price or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series. 

— In no real surprise, the headline contribution from governmental spending was a positive +0.09% — up +0.39% from the prior quarter. This momentary growth was entirely due to increased Federal fiscal year-end (“spend every last budgeted dime — even if we can’t possibly use whatever it is that we are buying”) spending — a recurring annual phenomenon that is accompanied by an offsetting fourth calendar quarter (first fiscal quarter) reversal of that growth. 

— The contribution to the headline number from exports improved significantly to +1.17% (up +0.96% from the prior quarter). 

— Imports subtracted -0.34% from the headline number, down -0.31% from the prior quarter. 

— The “real final sales of domestic product” actually decreased to +2.30%, down -0.28% from the prior quarter. This is the BEA’s “bottom line” measurement of the economy and it excludes the reported inventory growth. 

— As mentioned above, real per-capita annual disposable income was reported to have grown $127 in this report. The household savings rate was unchanged, and it remains down from the first quarter of 2016. It is important to keep this line item in perspective : real per-capita annual disposable income is up only +6.61% in aggregate since the second quarter of 2008 — a meager annualized +0.78% growth rate over the past 33 quarters.