May 31st, 2012
Real gross domestic income (GDI) increased 2.7% in the Q1’12, compared with an increase of 2.6% in Q4’11. Over longer time spans, the estimates of GDP and GDI tend to follow similar patterns of change. The fact that real GDI (+2.7% q/q AR) rose faster than real GDP (+1.9% q/q AR) in Q1 thus offers the possibility that the GDP data are understated. However, dealers were chilled Thursday by the BEA’s sharply lower revision to Q4’11 GDI and they express suspicion that the Q1 saving rate, now at a five-year low, can support future consumption.
RBS Securities found the updated Q4 GDI information to be more notable than the Q1 results. “In Q4, real GDI was initially reported to have risen by 4.4% annualized, well ahead of the 3.0% gain reported for real GDP (which is one reason the GDI series has received a good deal of attention recently). However, this advance in real GDI was revised down for Q4 to 2.6% annualized (much closer to the GDP print).” Much of that revision came from a sharp downward adjustment in wages and salaries in Q4. Specifically, Q4 growth in wages and salaries was cut from 5.4% annualized to just 1.7%. Private wages and salaries growth in Q1 was cut to 3.7% from 4.9% and in Q4 it was chopped to 2.1% from 6.6%. As such, the saving rate was trimmed 0.3-percentage point to 3.6% in Q1, the lowest reading since late 2007. RBS went on, “The downward revisions to wage and salary growth and the savings rate are a disappointment. At this time, we do not know if the revisions are due to fewer people working or people earning less money. The fourth quarter data on county employment and wages (QCEW) will provide important insight (these data will be released June 28). Through Q3, the county employment data were actually pointing to modest undercount in payrolls (e.g. a positive benchmark revision).”
Economists at UBS Investment Research believe the BEA’s downward revisions to recent wage and salary growth (and the saving rate) override any positive suggestions that Q1 GDP data are understated. Likewise, UBS was unimpressed by the meager 2.8% q/q annual rate gain in pre-tax corporate profits as it partly reflected slower wage growth. BNP Paribas emphasized how the large downward revision to personal income growth in the quarter carried significant implications for the profile of the personal saving rate, with the Q4 rate revised down to 4.2% from 4.5% and the Q1 rate revised down to 3.6% from 3.9%. BNP economists offered, “This restores the tension in the data between ongoing solid consumption growth and more modest personal income growth.” And because lower GDI growth (concentrated in a downward revision to Q4 real disposable income) further eroded the personal saving rate to 3.6%, Morgan Stanley Research declared, “This decline is unsustainable in our view and points to consumption growth trailing income growth in coming quarters.”
With the Q1 GDP revision matching the market consensus, Deutsche Bank Global Markets Research found the negatives in the report to have come from the income side of the GDP ledger. DBGMR wrote, “Household wages and salaries were revised down a cumulative $138 billion over Q4 2011 to Q1 2012. This offsets a sizeable portion of the $188 billion in upward revisions to wages and salaries that had occurred earlier on for the period Q3 2011 to Q4 2011. The net effect of these revisions was a lowering in the personal savings rate to 3.6% last quarter, down 0.6% from Q4 2011. All of these figures are susceptible to further revision next month, when the ‘final’ Q1 numbers are released. But this is a misnomer, because the Commerce Department will conduct its annual revisions at the end of July.* Recent history has shown the tendency for further substantial revisions to occur.”
* The GDP news release on July 27 will present the regular annual revision of the NIPAs. In addition to presenting the advance estimate of Q2’12 GDP, most estimates, including GDP, national income, personal income, and their components, will be revised from Q1’09 through Q1’12.
Credit Suisse US Economics said the new fourth quarter information on personal income “wasn’t pretty. Real disposable income is now estimated to have increased a miserly 0.2% (annual rate) in Q4, from 1.7% previously reported. The personal income data also capture irregular pay, such as bonuses and stock options (when exercised), and the BEA doesn’t break out the effect of such payments, which can be huge in any given quarter (especially in Q4s and Q1s). It’s possible these payments were responsible for the downward revision, but we are left wondering if that is the truth given the lack of published detail. But the strength in virtually every measure of employment during that time and the firmer reports on consumer spending would suggest that is the case.”
Not all firms are pessimistic. To economists at FT Advisors, the 2.7% annual rate in Q1 GDI still suggested future benchmark revisions to Q1 GDP are likely to be upward. They emphasized, “With nominal GDP (real growth plus inflation) up at a 3.6% annual rate in Q1 and up 3.9% from a year ago, there is no reason for further Fed easing.”
For RDQ Economics, “The real news is the implied income estimate of GDP, which continues to correlate more closely with job creation, hours worked, industrial production, and industry surveys than the ‘official’ expenditure estimate (the income estimate is based on official data but is not explicitly reported). The recovery on either measure is very anemic but the average growth rate of 2.8% since the recession ended (income estimate) is nonetheless a stronger reading than expenditure estimate gain of 2.4% and better explains the decline in unemployment.”
MFR, Inc. remarked, “With real wages and salaries now estimated to have grown at only a 0.7% annualized rate in Q4 and Q1, and the saving rate revised down, the consumer is clearly in a weaker position than previously reported. Lower gasoline prices will help to cushion the blow, but, as always, the direction of the labor market will be the key variable in coming months.”
Finally, UniCredit Research offered, “The lackluster rise in real disposable incomes relentlessly revealed one of the biggest, if not the biggest, obstacles to a stronger recovery. The reason why we continue to expect that consumer spending will remain the main driver of the expansion is that households have fallen back into old patterns: Over the last five months, consumer credit has risen at the fastest pace in ten years (after the post-9/11 spending spree), while the savings rate fell to a fresh four-year low. In addition to the ample usage of credit, falling energy prices should temporarily boost purchasing power in the spring, and therefore support consumption. Finally, we expect capex spending to regain momentum after taking a breather in 1H12 due to the end of the bonus depreciation, while government spending should be less of a drag. All said, we continue to expect that the US economy will expand by 2¼% in the current quarter, followed by 2½% in the second half of the year. The short-term outlook, therefore, remains solid.”