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By Jason Stipp | 02-29-2012 11:00 AM

Consumers Not on Last Leg

Revised GDP data this week showed consumers' disposable income and savings rate was stronger than originally calculated.

Jason Stipp: I'm Jason Stipp for Morningstar.

We got revised GDP data for the fourth quarter. It showed that GDP grew 3%. Here with me to dig into the numbers is Morningstar's Bob Johnson, director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: When you looked at the revised numbers, you did pick out a few important details; one of them had to do with incomes. That was a different number than we saw in the first report. What did that tell you?

Johnson: A lot of things are in this GDP report. It tells us a lot of different things. It is a very comprehensive report, and there are a lot of adjustments they made this time.

But there's one that really stood out, and that was the personal income number, the real disposable personal income number, was much better than we had previously thought. They had thought kind of 0.8% [growth] and now they are thinking 1.4% instead on that number.

So that's a very large increase, and it in fact begins to explain the mystery of why holiday shopping was as strong as it was--because we have looked at the numbers and said, "Wow, where did all this [spending] come from?" Even I was a little dismayed. How it appeared was that we had dipped into savings.

Stipp: I know that was a big concern that people were spending their savings. Initially... market watchers thought that people were spending into savings, and it wouldn't be sustainable, but this would tend to counteract that. Did the savings rate change as well? Do we have any more insight on that?

Johnson: Yes. When you looked at the savings rate number, it was 4.5% [in the revised report] instead of 3.7%. So a major revision from one to the other, and now even less drastic compared to the year ago, when we were in the mid-5% range. So much less of the [spending] growth came from dipping into savings or taking out more loans. Combined, those factors were much less of a factor than we thought one month ago.

And that's really the key news, that the consumer is not on his deathbed just spending his last dollar on holiday shopping, now to go off into nowhere. It turns out that income was a lot better than people thought.

Stipp: Any insights on why income was better? What they missed in the first report that they were able to catch in this revision?

Johnson: Yes, the first run of the personal income numbers are done off of the employment report from the Labor Bureau. And they just take those and multiply them by an average wage and get a number. Of course, you've seen the revisions that we've had in the jobs reports over the last few months--we'll add 50,000 here and 50,000 there, and all of a sudden they add up to big numbers, especially when you start to annualize relatively short periods of time.

So that's what really helped, and we'll even get a read when we get out towards June, and then they go back to payroll data, and then eventually we go to W-2 IRS tax form type of data to get the wage data. But at first, they estimate it off of employment, and that's been drastically revised upward.

Stipp: Any other things that contributed to that upward revision when you looked at the new fourth-quarter number?

Johnson: There were a lot of little things in there. Consumption was a little better, and specifically services were better. As you know, I like services because that means less imports eventually. So I'm glad to see the services number acting a little better. So that was probably the biggest revision in the numbers.

The inventory was just a little bit less of a factor. It was still a very large factor, but not as big a factor as previously thought.

Imports were a little bit smaller than people thought, so that’s a net add to GDP, so those were all good numbers.

Non-durable goods, food type stuff, was a little bit worse.

Stipp: And we also saw that government spending was a headwind for GDP. How did that affect the number?

Johnson: Defense spending took away 0.7% from the GDP number. That number is a volatile series. I don’t think that number is ever going to be a big adder, or maybe it's on a slow downtrend, but it was a big subtraction this time around. I doubt that it's going to be that type of subtraction in the future.

Stipp: It likely will be somewhat of a subtraction just given the budget issues, but that's a pretty big headwind?

Johnson: The non-defense part--you think all the schools, the teachers, all those things were a small subtraction. The biggest part of the government shrinkage was the defense spending that came back in dramatically.

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