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posted on 30 July 2015

Advance Estimate 2Q2015 GDP Growth at 2.3%. First Quarter GDP Revised Upward.

Written by Doug Short and Steven Hansen

The advance estimate of second quarter 2015 Real Gross Domestic Product (GDP) is a positive 2.3%. This is a significant improvement from the previous quarter's 0.6 % if one looks at quarter-over-quarter headlines. However, year-over-year growth declined so one could say economic growth was mixed.There are significant "buts" relative to this advance GDP estimate (see below).

The market expected:

Seasonally Adjusted Quarter-over-Quarter Change at annual rate Consensus Range Consensus Actual
Real GDP 1.9 % to 3.5 % 2.9 % +2.3 %
GDP price index -0.1 % to 2.0 % 0.5 % +1.4 %

The estimate for first quarter GDP has also been revised upward.

For the first quarter of 2015, real GDP is now estimated to have increased 0.6 percent; in the previously published estimates, first-quarter GDP was estimated to have decreased 0.2 percent. The 0.8- percentage point upward revision to the percent change in first-quarter real GDP primarily reflected upward revisions to nonresidential fixed investment, to private inventory investment, to residential fixed investment, and to federal government spending that were partly offset by a downward revision to PCE.

One must consider:

  • This advance estimate released today is based on source data that are incomplete or subject to further revision. (See caveats below.) Please note that historically advance estimates have turned out to be little more than wild guesses.
  • Headline GDP is calculated by annualizing one quarter's data against the previous quarters data (and the previous quarter was relatively strong in this instance). A better method would be to look at growth compared to the same quarter one year ago. For 2Q2015, the year-over-year growth is 2.3% - down from 1Q2015's 2.9% year-over-year growth. So one might say that GDP decelerated 0.6% from the previous quarter.
  • Change in inventories insignificantly affected GDP this quarter.

Real GDP Expressed As Year-over-Year Change

Real GDP is inflation adjusted and annualized - and Real GDP per capita remains on a general upward trend.

Real GDP per Capita

The table below compares the 1Q2015 third estimate of GDP (Table 1.1.2) with the advance estimate of 2Q2015 GDP which shows:

  • consumption for goods and services improved.
  • trade balance improved
  • there was little inventory change
  • there was little fixed investment growth
  • there was little change in government spending

The arrows in the table below highlight significant differences between 4Q2014 and 1Q2015 (green is good influence, and red is a negative influence).

[click on graphic below to enlarge]

What the BEA says about this advance estimate:

The acceleration in real GDP growth in the second quarter reflected an upturn in exports, an acceleration in PCE, a deceleration in imports, and an upturn in state and local government spending that were partly offset by downturns in private inventory investment, in nonresidential fixed investment, and in federal government spending and a deceleration in residential fixed investment.

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:

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 3.24% average (arithmetic mean) and the 10-year moving average, currently at 1.42 percent.

Note: The headline 2.3% GDP is 2.32% at 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 14.6% 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.

Real GDP Year-over-Year

In summary, the Q2 GDP Advance Estimate of 2.3 percent was close to mainstream estimates and a welcome improvement over Q1.

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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