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posted on 27 February 2015

Second Estimate 4Q2014 GDP Revised Down to 2.2%

Written by Doug Short and Steven Hansen

The second estimate of fourth quarter 2014 Real Gross Domestic Product (GDP) is now a positive 2.2%. This data point was +2.6% in the advance GDP estimate. The downward revision to the percent change in real GDP primarily reflected downward revision to private inventory investment.

The market expected:

Seasonally Adjusted Quarter-over-Quarter Change at annual rate Consensus Range Consensus Advance Actual 2nd Estimate Actual
Real GDP 1.7 % to 2.4 % 2.1 % 2.6 % 2.2 %
GDP price index 0.0 % to 0.0 % 0.0 % 0.0 % 0.1 %

Headline GDP is calculated by annualizing one quarter's data against the previous quarters data (and the previous quarter was strong in this instance). A better method would be to look at growth compared to the same quarter one year ago. For 4Q2014, the year-over-year growth is 2.4% - down from 3Q2014's 2.7% year-over-year growth. So one might say that GDP growth decelerated 0.3%.

Real GDP Expressed As Year-over-Year Change

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 depletion.

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 and per capita GDP has now recovered from the values before the Great Recession.

Real GDP per Capita

The table below compares the 3Q2014 third estimate of GDP (Table 1.1.2) with the advance and second estimates 4Q2014 GDP which shows:

  • consumption for goods and services improved
  • trade balance worsened
  • there was an inventory growth adding 0.1% to GDP;
  • fixed investment growth worsened;
  • government lack of spending was a headwind to GDP.

The arrows in the table below highlight significant differences between 4Q2014 advance estimate and this 4Q2014 second estimate (green is good influence, and red is a negative influence).

[click on graphic below to enlarge]

What the BEA says about the second estimate of 4Q2014 GDP:

In the advance estimate, the increase in real GDP was 3.5 percent. With the second estimate for the third quarter, private inventory investment decreased less than previously estimated, and both personal consumption expenditures (PCE) and nonresidential fixed investment increased more. In contrast, exports increased less than previously estimated.

The increase in real GDP in the third quarter reflected positive contributions from PCE, nonresidential fixed investment, federal government spending, exports, residential fixed investment, and state and local government spending that were partly offset by a negative contribution from private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased. The deceleration in the percent change in real GDP reflected a downturn in private inventory investment and decelerations in exports, in nonresidential fixed investment, in state and local government spending, in PCE, and in residential fixed investment that were partly offset by a downturn in imports and an upturn in federal government spending.

Inflation continues to moderate as the "deflator" which adjusts the current value GDP to a "real" comparable value continues to moderate. The following compares the GDP deflator to the Consumer Price Index:

BLS tabulation of the changes to 4Q2014 GDP:

The "second" estimate of the fourth-quarter percent change in GDP is 0.4 percentage point, or $17.9 billion, less than 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 upward revisions to nonresidential fixed investment and to state and local government spending.

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.

Here is a log-scale chart of real GDP with an exponential regression, which helps us understand growth cycles since the 1947 inception of quarterly GDP. The latest number puts us 13.6% below trend. That is slightly off the 14.0% below in Q1 of 2014.

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 Q4 GDP Second Estimate of 2.2 percent was within the forecasts of most mainstream economists.

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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