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posted on 29 May 2015

Second Estimate 1Q2015 GDP Revised Down to NEGATIVE 0.7%

Written by Doug Short and Steven Hansen

The second estimate of first quarter 2015 Real Gross Domestic Product (GDP) is now a negative 0.7%. This data point was +0.2% in the advance GDP estimate. The downward revision to the percent change in real GDP primarily reflected downward revision to private inventory and greater imports (which are deducted from GDP).

The market expected:

Seasonally Adjusted Quarter-over-Quarter Change at annual rate Consensus Range Consensus Advance Actual 2nd Estimate Actual
Real GDP -1.0 % to -0.2 % -0.8 % 0.2 % -0.7 %
GDP price index -0.1 % to -0.1 % -0.1 % -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 1Q2015, the year-over-year growth is 2.7% - up from 4Q2014's 2.4% year-over-year growth. So one might say that GDP growth accelerated 0.3%. The year-over-year acceleration adds fuel to the fire that there is a methodology problem with determining first quarter GDP.

Real GDP Expressed As Year-over-Year Change

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 4Q2014 third estimate of GDP (Table 1.1.2) with the advance / second estimate of 1Q2015 GDP which shows:

  • consumption for goods and services declined.
  • trade balance worsened
  • there was an inventory growth adding 0.3% to GDP;
  • fixed investment growth was declined;
  • government lack of spending improved but remains a headwind to GDP.

The arrows in the table below highlight significant differences between 1Q2015 advance estimate and this 1Q2015 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 1Q2015 GDP:

Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- decreased at an annual rate of 0.7 percent in the first quarter of 2015, according to the "second" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.2 percent.

The decrease in real GDP in the first quarter primarily reflected negative contributions from exports, nonresidential fixed investment, and state and local government spending that were partly offset by positive contributions from personal consumption expenditures (PCE), private inventory investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

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 1Q2015 GDP:

The second estimate of the first-quarter percent change in real GDP is 0.9 percentage point, or $40.7 billion, less than the advance estimate issued last month, primarily reflecting an upward revision to imports and downward revisions to private inventory investment and to personal consumption expenditures that were partly offset by an upward revision to residential fixed investment.

Overview Analysis:

Here is a look at Quarterly GDP since Q2 1947. Prior to 1947, GDP was calculated annually. To be more precise, the chart shows is the annualized percent change from the preceding quarter in Real (inflation-adjusted) Gross Domestic Product. We've also included recessions, which are determined by the National Bureau of Economic Research (NBER). Also illustrated are the 3.26% average (arithmetic mean) and the 10-year moving average, currently at 1.48 percent.

Note: The headline -0.7% GDP is -0.749% at three decimal places. The callout in chart above is rounded to two decimal places.

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 14.3% below trend, the largest negative spread in the history of this series.

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

Click to View

In summary, the Q1 GDP Advance Estimate of -0.7 percent was about what mainstream economic estimated.

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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