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posted on 29 October 2015

Advance Estimate 3Q2015 GDP Growth at 1.5%. A Significant Slowing of Economic Growth.

Written by Doug Short and Steven Hansen

The advance estimate of third quarter 2015 Real Gross Domestic Product (GDP) is a positive 1.5 %. This is a significant decline from the previous quarter's 3.9 % if one looks at quarter-over-quarter headline growth. 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 major reasons for the decline in GDP growth were personal consumption for goods, fixed investment, and inventories.

The market expected:

Seasonally Adjusted Quarter-over-Quarter Change at annual rate Consensus Range Consensus Actual
Real GDP 1.0 % to 2.3 % 1.7 % +1.5 %
GDP price index 0.8 % to 2.0 % 1.4 % +1.2 %

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 3Q2015, the year-over-year growth is 2.0 % - significantly down from 2Q2015's 2.7 % year-over-year growth. So one might say that GDP decelerated 0.7% from the previous quarter.
  • Change in inventories significantly 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 2Q2015 third estimate of GDP (Table 1.1.2) with the advance estimate of 3Q2015 GDP which shows:

  • consumption for goods and services declined.
  • trade balance degraded
  • there was significant inventory change removing 1.4% from GDP
  • there was slower 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 increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), state and local government spending, nonresidential fixed investment, exports, and residential fixed investment that were partly offset by negative contributions from private inventory 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:

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 1.5% GDP is 1.49% 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 14.5% 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 Q3 GDP Advance Estimate of 1.5 percent was slightly below mainstream estimates and a sharp decline over the 3.9 percent of Q2.

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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