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posted on 24 June 2015

Third Estimate 1Q2015 GDP "Improves" to 0.2% Contraction.

Written by Doug Short and Steven Hansen

The third estimate of first quarter 2015 Real Gross Domestic Product (GDP) improved to a negative 0.2%. This "improvement" was due to upward revisions to exports, to personal consumption expenditures, to private inventory investment, to nonresidential fixed investment, and to state and local government spending that were partly offset by an upward revision to imports.

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 -0.4 % to 0.1 % -0.2 % 0.2 % -0.7 % -0.2%
GDP price index -0.1 % to -0.1 % -0.1 % -0.1 % -0.1 % 0.0 %

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 2.9% - up from 4Q2014's 2.4% year-over-year growth. So one might say that GDP growth accelerated 0.5%. The year-over-year acceleration adds fuel to the fire that there is a methodology problem with determining first quarter GDP.

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 declined on a per capita basis.

Real GDP per Capita

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

  • consumption for goods and services declined.
  • trade balance worsened
  • there was an inventory growth adding 0.45% 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 second estimate and this 1Q2015 third estimate (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 GDP:

Real GDP decreased 0.2 percent in the first quarter of 2015, in contrast to an increase of 2.2 percent in the fourth quarter of 2014. The downturn in the percent change in real GDP reflected a deceleration in PCE and downturns in exports, in nonresidential fixed investment, and in state and local government spending that were partly offset by upturns in private inventory investment and in federal government spending and a deceleration in imports.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, decreased 1.6 percent in the first quarter, the same decrease as in the second estimate; this index decreased 0.1 percent in the fourth quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 0.1 percent, compared with an increase of 0.7 percent.

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 "third" estimate of the first-quarter percent change in GDP is 0.5 percentage point, or $23.6 billion, more than the second estimate issued last month, primarily reflecting upward revisions to exports, to personal consumption expenditures, to private inventory investment, to nonresidential fixed investment, and to state and local government spending that were partly offset by an upward revision to imports.

In the same release, corporate profits data was released showing less growth in 1Q2015.

Profits from current production (corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)) decreased $110.8 billion in the first quarter, compared with a decrease of $30.4 billion in the fourth.

Profits of domestic financial corporations decreased $2.1 billion in the first quarter, compared with a decrease of $12.5 billion in the fourth. Profits of domestic nonfinancial corporations decreased $79.6 billion, in contrast to an increase of $18.1 billion. The rest-of-the-world component of profits decreased $29.0 billion, compared with a decrease of $36.1 billion. 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 first quarter, receipts decreased $40.0 billion, and payments decreased $11.0 billion.

Taxes on corporate income increased $25.3 billion in the first quarter, in contrast to a decrease of $4.8 billion in the fourth. Profits after tax with IVA and CCAdj decreased $136.1 billion, compared with a decrease of $25.8 billion. The first-quarter changes in taxes on corporate income mainly reflect the expiration of bonus depreciation provisions. For further explanation, see the box below.

Dividends increased $5.8 billion in the first quarter, compared with an increase of $18.6 billion in the fourth. Undistributed profits decreased $141.8 billion, compared with a decrease of $44.3 billion. Net cash flow with IVA -- the internal funds available to corporations for investment -- decreased $135.7 billion, in contrast to an increase of $12.2 billion.

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 1.49 percent.

Note: The headline -0.2% GDP is -0.172% 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 14.2% 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 third Estimate of -0.2 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.

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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