Joe covered the GDP release for Q1 2013 earlier where he noted that:
“While on the surface that seems better than the 4th quarter rate of 0.4%, the details were actually worse in many ways.”
I wanted to follow up with one of those “worse” features – consumer spending on housing “services”. This is a topic I have covered many times and one which I don’t believe there is enough appreciation. The vast majority of the spending line for “housing services” comes from the imputation of owner’s implied rent.
The technical name is “imputed rental of owner-occupied nonfarm housing”. It is an economic fantasy, a figment of the BEA’s economic accounts. Because the BEA wants to show a positive economic contribution from Americans owning houses, or what the BEA states as keeping the economic accounts “invariant” between changes in home ownership, the agency makes up a number to plug into the GDP calculation under the personal spending on services segment.
The reasoning for the imputation fantasy is sound, though misguided as I will show. Since we largely believe that increasing ownership is a societal “good”, it should get reflected in the GDP account. Shelter is, after all, a meaningful and valuable good/service, if sometimes more intangible toward measurement. If there were no imputation here, an increase in the proportion of home ownership would actually shrink GDP since there would be less income paid to rental property owners (and the flipside would be less rental expenses for households). Since a growing proportion of home ownership is believed to be consistent with a growing economy, then the imputation is made to keep GDP “invariant” to home ownership changes. Mortgage payments are accounted for by other measures.
To come up with a dollar figure, the BEA treats home owners (that actually live in the home they own) as unincorporated businesses that charge rent to themselves. In other words, if you own your own home that you live in, the BEA thinks of you as both landlord and renter. The amount of rent that you would theoretically pay yourself under such an arrangement is the imputation amount (in the aggregate). The BEA actually conducts a survey to gauge this fake value.
We are not talking about a small number here. The imputed amount for 2011 was $1.2 trillion, an outsized proportion of total GDP.
Nearly 12% of GDP is a fictitious fantasy of bureaucratic economic accounting. Where it is misguided, in my opinion, is its inclusion as a measure of economic function and health. The healthy economic system is not one that simply and mindlessly circulates money, it is a system that creates the opportunity for growing and expanding labor specialization. The imputation of owner-occupied rent, then, is misplaced in that there is no labor opportunity here. No jobs are or will ever be created in the fantasy of theoretical rental calculations.
By contrast, renting a property likely leads to job creation, or at least real income to property owners that is reinvested in job creating opportunities. The imputation does not imply anything with regard to the economy’s ability to circulate money into true labor income and business exchange.
Because of this and the size of the imputation, its inclusion in PCE services skews that measure far above where it would be without the fantasy. This was particularly true in 2008 and 2009, where imputed rent fell in rate but not in absolute terms like the economy. That means that consumer spending in the Great Recession calculated in this fashion was actually well above where it likely was in reality. True consumer spending likely fell much worse than GDP shows (11.7% of total GDP accounting for 2008 was “growing” at more than 3% while the rest of the economy fell sharply).
Since 2010, imputed rent has been rising again. While we don’t have details for 2012 and 2013, we know that spending on housing “services”, of which imputed rent is the majority, was a large part of PCE growth in Q1 ’13. In fact, services spending, in sharp contrast to spending on goods (both durable and non), was the highest of the recovery period in March.
So while consumer spending on nondurable goods has fallen slightly (on a seasonally adjusted basis) since September 2012, and durable goods has fallen slightly since December, services is at a new high, with housing services leading the way. If we take the view that housing services is not a real number, particularly in that there are no jobs that follow from it, then it is a hollow rise that portrays nothing meaningful about economic health.
Adjusting GDP in Q1, then, for the increase in housing services spending, we see exactly what Joe was talking about.
I also removed personal spending on financial services for the same reasoning – there are no real jobs associated with financial services spending. The “income” side of that equation is the scalping of asset prices and fees by banks. While they might create some minimal number of jobs to complete these “tasks”, the largest financial firms have all shed jobs in the past year despite rising profits (and flat revenues).
While some might accuse me of cherrypicking stats and adjustments, the reduced adjusted-growth rate shown above is actually far more consistent with other economic measures. Final sales to domestic producers measures the economy from the standpoint of actual domestic production levels – GDP less imports and inventory changes. This shows us the demand for US produced goods and services regardless of who does the buying (since it includes exports). Not a robust picture here.
While it might be tempting to explain that weakness on the collapse in global trade and the deepening depression in Europe, the counterpart to that account is final sales to domestic purchasers. This shows the level of aggregate demand (not the disastrous monetary concept) in the US (since it includes the imported goods we buy). Again, we are not seeing a measure of economic health here – particularly since domestic demand is largely supported by actual income as opposed to imputations of it.
Like with so many of these economic accounts, the current read in final sales to domestic purchasers is, in the four quarter average trend, at levels consistent with previous recessions.
I think it pretty safe to conclude that Joe’s interpretation of Q1 GDP was correct. The economy is about jobs and income, not GDP accounts and fantasy.