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posted on 27 August 2015

Second Estimate 2Q2015 GDP Revised Significantly Upward to 3.7%

Written by Doug Short and Steven Hansen

The second estimate of second quarter 2015 Real Gross Domestic Product (GDP) is now a positive 3.7 %. This data point was +2.3% in the advance GDP estimate. The upward revision to the percent change in real GDP primarily reflected reflected an upturn in exports, an acceleration in PCE, a deceleration in imports, an upturn in state and local government spending,

The market expected:

Seasonally Adjusted Quarter-over-Quarter Change at annual rate Consensus Range Consensus Advance Actual 2nd Estimate Actual
Real GDP 2.7 % to 3.6 % +3.2 % +2.3 % +3.7 %
GDP price index 1.9 % to 2.1 % +2.0 % +1.4 % +1.5 %

Headline GDP is calculated by annualizing one quarter's data against the previous quarters data (and the previous quarter was relatively weak 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 2.7% - down from 1Q2015's 2.9% year-over-year growth. So one might say that GDP decelerated 0.2 % from the previous quarter.

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 1Q2015 GDP (Table 1.1.2) with 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 significant growth in local in government spending

The arrows in the table below highlight significant differences between the advance and second estimates (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 GDP:

Real gross domestic product -- the value of the goods and services produced by the nation's economy less the value of the goods and services used up in production, adjusted for price changes -- increased at an annual rate of 3.7 percent in the second quarter of 2015, according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.6 percent.

The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE), exports, state and local government spending, nonresidential fixed investment, residential fixed investment, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.

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

Real gross domestic income (GDI) -- the value of the costs incurred and the incomes earned in the production of goods and services in the nation's economy -- increased 0.6 percent in the second quarter, compared with an increase of 0.4 percent (revised) in the first. The average of real GDP and real GDI, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 2.1 percent in the second quarter, compared with an increase of 0.5 percent in the first quarter.

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 2Q2015 GDP:

The upward revision to the percent change in real GDP primarily reflected upward revisions to nonresidential fixed investment, to private inventory investment, to state and local government spending, and to PCE and a downward revision to imports. For information on revisions, see "The Revisions to GDP, GDI, and Their Major Components."

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 3.25% average (arithmetic mean) and the 10-year moving average, currently at 1.46 percent.

Note: The headline 3.7% GDP is 3.68% 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 14.4% 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 Q2 GDP Second Estimate of 3.7 percent was slightly above mainstream estimates and an improvement over the 2.3 percent Advanced Estimate.

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 Q2 GDP Second Estimate of 3.7 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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