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posted on 27 March 2015

Third Estimate 4Q2014 GDP Unchanged at 2.2%. Corporate Profits Down.

Written by Doug Short and Steven Hansen

The third estimate of fourth quarter 2014 Real Gross Domestic Product (GDP) was unchanged at positive 2.2%. Private inventories decline was offset by higher personal consumption and slightly better trade data.

The market expected:

Seasonally Adjusted Quarter-over-Quarter Change at annual rate Consensus Range Consensus Advance Actual 2nd Estimate Actual 3rd Estimate Actual
Real GDP 2.1 % to 2.6 % 2.1 % 2.6 % 2.2 % 2.2%
GDP price index 0.1 % to 0.1 % 0.0 % 0.0 % 0.1 % -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% from the third quarter.

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

Real GDP is inflation adjusted and annualized - the economy improved on a cumulative and on a per capita basis.

Real GDP per Capita

The table below compares the 3Q2014 third estimate of GDP (Table 1.1.2) with the advance, second and third estimates 4Q2014 GDP. Comparing the third estimates between the quarters:

  • consumption for goods and services declined
  • trade balance worsened
  • inventory decline removed 0.1% of GDP;
  • fixed investment growth worsened;
  • government lack of spending was a headwind to GDP.

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

[click on graphic below to enlarge]

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

The increase in real GDP in the fourth quarter reflected positive contributions from PCE, nonresidential fixed investment, exports, state and local government spending, and residential fixed investment that were partly offset by negative contributions from federal government spending and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP growth in the fourth quarter primarily reflected an upturn in imports, a downturn in federal government spending, a deceleration in nonresidential fixed investment, and a larger decrease in private inventory investment that were partly offset by accelerations in PCE and in state and local 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 implicit price deflator year-over-year growth to the Consumer Price Index [this puts both on the same basis for comparision]:

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

The growth rate in real GDP was the same as was estimated last month, primarily reflecting upward revisions to exports and to personal consumption expenditures (PCE) that were mostly offset by a downward revision to private inventory investment.

In the same release, corporate profits data was released showing contraction in 4Q2014.

Profits from current production (corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)) decreased $30.4 billion in the fourth quarter, in contrast to an increase of $64.5 billion in the third.

Profits of domestic financial corporations decreased $12.5 billion in the fourth quarter, in contrast to an increase of $16.1 billion in the third. Profits of domestic nonfinancial corporations increased $18.1 billion, compared with an increase of $32.0 billion. The rest-of-the-world component of profits decreased $36.1 billion in the fourth quarter, in contrast to an increase of $16.5 billion in the third. This measure is calculated as the difference between receipts from the rest of the world and payments to the rest of the world. In the fourth quarter, receipts decreased $36.5 billion, and payments decreased $0.4 billion.

Taxes on corporate income decreased $4.8 billion in the fourth quarter, compared with a decrease of $5.5 billion in the third. Profits after tax with IVA and CCAdj decreased $25.8 billion, in contrast to an increase of $70.1 billion.

Dividends increased $18.6 billion in the fourth quarter, in contrast to a decrease of $3.9 billion in the third. Undistributed profits decreased $44.3 billion, in contrast to an increase of $73.9 billion. Net cash flow with IVA -- the internal funds available to corporations for investment -- increased $12.2 billion, compared with an increase of $46.9 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.

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 Third Estimate was slightly below expections of and which was 2.4%.

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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