US 3Q GDP Numbers As Misleading As Ever?

On the surface, the recent U.S. GDP numbers looked great. I hear the U.S. economy grew at a revised annual pace of 3.6% in the third quarter of 2013—its fastest GDP growth rate since at least the financial crisis. (Source: Bureau of Economic Analysis, December 5, 2013.)

But when I look closer at the numbers released by the government, I discover the U.S. economy didn’t grow due to consumer spending, the most important factor of economic growth, but rather due to a lack of consumer spending!

Let me explain...

In the third quarter, real personal consumption expenditure (a measure of consumer spending) increased by only 1.4%. That’s down 30% from the second quarter!

So how did GDP rise so much in the third quarter while consumer spending pulled back?

U.S. GDP increased in the third quarter because businesses stockpiled more of their goods. In the third quarter, private inventories increased by $116.5 billion; in the second quarter, they increased by $56.6 billion; and, in the first quarter, they increased by $42.2 billion.

The way GDP is calculated, an increase in business inventories pushes up GDP growth! Now the kicker: almost 50% of the increase in U.S. GDP in the third quarter came from an increase in business inventories!

This worries me a lot.

Rapidly increasing business inventories is a major sign that consumer spending isn’t growing. Those who say there’s economic growth in the U.S. economy have to be very careful in their conclusion. Consumer spending is the backbone of U.S. economy. If it declines, we will have economic suffering across the board.

As some point, businesses will have to stop stockpiling the goods they produce and start laying off staff if those inventories are not taken down; they can’t just go on creating more and more inventory if that inventory isn’t moving.

The statistics I see and interpret tell me that consumer spending in the U.S. economy is in trouble. Obviously, this is not good for corporate earnings. But have no fear, dear reader. The stock market is continuing to rise, the “official” government statistics show that the unemployment picture is improving, and the U.S. GDP is improving. Now, if I could only believe those statistics…

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