Second Estimate 1Q2014 GDP Revised Down - Economy Was In Contraction

May 29th, 2014
in aa syndication, gdp

Written by Doug Short and

The second estimate of first quarter 2014 Real Gross Domestic Product (GDP) is now a negative 1.0%.

  • The market expected GDP at -0.8% to 0.2% (consensus -0.5%).
  • This data point was +0.1% in the advance GDP estimate.


Follow up:

If one wants to pick a single reason for the downward revision of GDP between the advance and second estimate – it was due to inventory contraction.

This second estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. (See caveats below.)

Real GDP is inflation adjusted and annualized – the economy contracted per capita in the first quarter, but per capita GDP has now recovered from the values before the Great Recession.

Real GDP per Capita

The table below compares the 4Q2013 GDP (Table 1.1.2) with the advance and second estimate 1Q2014 GDP which shows:

  • consumer consumption did not change much between quarters and between the advance and second estimates;
  • trade balance worsened mostly due to declining exports;
  • there was an inventory decline (negative for GDP but positive to the REAL economy);
  • government drag on GDP continues but is less than 4Q2013.

The arrows in the table below show the improvement between the advance and second estimate.

[click on graphic below to enlarge]

What the BEA says about the second estimate of 1Q2014 GDP:

The downturn in the percent change in real GDP primarily reflected a downturn in exports, a larger decrease in private inventory investment, and downturns in nonresidential fixed investment and in state and local government spending that were partly offset by an upturn in federal government spending.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.3 percent in the first quarter, 0.1 percentage point less than in the advance estimate; this index increased 1.5 percent in the fourth quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.3 percent in the first quarter, compared with an increase of 1.8 percent in the fourth.

Inflation continues to moderate as the “deflator” which adjusts the current value GDP to a “real” comparable value continues to moderate. The market expected the deflator at 1.3% to 1.4% (consensus is 1.3%) versus the reported 1.3%. The following compares the GDP deflator to the Consumer Price Index:

What the BLS says about the revision from the advance to the second estimate:

The second estimate of the first-quarter percent change in real GDP was revised down 1.1 percentage points, or $43.7 billion, from the advance estimate issued last month, primarily reflecting a downward revision to private inventory investment and an upward revision to imports that were partly offset by an upward revision to exports.

In the same release, corporate profits data was released showing contraction in 1Q2014 :

Profits from current production (corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)) decreased $213.4 billion in the first quarter, in contrast to an increase of $47.1 billion in the fourth. The IVA decreased $32.3 billion, compared with a decrease of $0.5 billion. The CCAdj decreased $182.5 billion, compared with a decrease of $1.5 billion. The IVA and CCAdj convert inventory withdrawals and depreciation of fixed assets reported on a tax-return, historical-cost basis to the current-cost economic measures used in the NIPAs.

Taxes on corporate income increased $26.2 billion in the first quarter, compared with an increase of $13.3 billion in the fourth. Profits after tax with IVA and CCAdj decreased $239.5 billion, in contrast to an increase of $33.8 billion. The first-quarter changes in taxes on corporate income and in CCAdj mainly reflect the expiration of bonus depreciation provisions. For further explanation, see the box below.

Dividends decreased $89.0 billion in the first quarter, in contrast to an increase of $90.5 billion in the fourth. Undistributed profits decreased $150.6 billion, compared with a decrease of $56.7 billion. Net cash flow with IVA -- the internal funds available to corporations for investment -- decreased $131.6 billion, compared with a decrease of $43.0 billion.

Overview Analysis:

Here is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. To be more precise, what the lower half of the chart shows is the percent change from the preceding period in Real (inflation-adjusted) Gross Domestic Product. I’ve also included recessions, which are determined by the National Bureau of Economic Research (NBER).

Here is a close-up of GDP alone with a line to illustrate the 3.3 average (arithmetic mean) for the quarterly series since the 1947. I've also plotted the 10-year moving average, currently at 1.6 percent, down from 1.7 percent last quarter.

Here is the same chart with a linear regression that illustrates the gradual decline in GDP over this timeframe.

A particularly telling representation of slowing growth in the US economy is the year-over-year rate of change.

Click to View

And for a bit of political trivia, here is a look at GDP by party in control of the White House and Congress.

In summary, the Q1 GDP Second Estimate of -1.0 percent was well below forecasts, although it's likely that mainstream economists will continue to write off the weakness as a transient result of a severe winter. On June 25th we'll get the Third Estimate.

The chart below is a way to visualize real GDP change since 2007. The chart uses a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. As the analysis clear shows, personal consumption is key factor in GDP mathematics.

Click to View

Caveats on the Use of Gross Domestic Product (GDP)

GDP is market value of all final goods and services produced within the USA where money is used in the transaction – and it is expressed as an annualized number. GDP = private consumption + gross investment + government spending + (exports − imports), or GDP = C + I + G + (X – M). GDP counts monetary expenditures. It is designed to count value added so that goods are not counted over and over as they move through the manufacture – wholesale – retail chain.

The vernacular relating to the different GDP releases:

“Advance” estimates, based on source data that are incomplete or subject to further revision by the source agency, are released near the end of the first month after the end of the quarter; as more detailed and more comprehensive data become available, “second” and “third” estimates are released near the end of the second and third months, respectively. The “latest” estimates reflect the results of both annual and comprehensive revisions.

Consider that GDP includes the costs of suing your neighbor or McDonald’s for hot coffee spilled in your crotch, plastic surgery or cancer treatment, buying a new aircraft carrier for the military, or even the replacement of your house if it burns down – yet little of these activities is real economic growth.

GDP does not include include home costs (other than the new home purchase price even though mortgaged up the kazoo), interest rates, bank charges, or the money spent buying anything used.

It does not measure wealth, disposable income, or employment.

In short, GDP does not measure the change of the economic environment for Joe Sixpack in 1970, and Joe Sixpack’s kid, yet pundits continuously compare GDP across time periods.

Although there always will be some correlation between all economic pulse points, GDP does not measure the economic elements that directly impact the quality of life of its citizens.

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