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posted on 24 November 2015

Second Estimate 3Q2015 GDP Revised Upward to 2.1%

Written by Doug Short and Steven Hansen

The second estimate of third quarter 2015 Real Gross Domestic Product (GDP) is a positive 2.1 %. This is a moderate increase from the advance estimates +1.5 % if one looks at quarter-over-quarter headline growth. Year-over-year growth declined from the previous quarter. The major reason for the improvement in GDP growth from the advance estimate was a "less bad" decline in inventories.

The market expected:

Seasonally Adjusted Quarter-over-Quarter Change at annual rate Consensus Range Consensus Advance Actual 2nd Estimate Actual
Real GDP 1.8 % to 2.4 % +2.1 % +1.5 % +2.1 %
GDP price index 1.2 % to 1.4 % +1.2 % +1.2 % +1.3 %

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 2.2 % - significantly down from 2Q2015's 2.7 % year-over-year growth. So one might say that GDP decelerated 0.5% 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 per Capita

The table below compares the 2Q2015 third estimate of GDP (Table 1.1.2) with the advance and second estimate of 3Q2015 GDP which shows:

  • consumption for goods and services declined.
  • trade balance degraded
  • there was significant inventory change removing 0.6 % 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 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 2.1 percent in the third quarter of 2015, according to the "second" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.9 percent.

The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 1.5 percent. With the second estimate for the third quarter, the decrease in private inventory investment was smaller than previously estimated.

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

The deceleration in real GDP in the third quarter primarily reflected a downturn in private inventory investment and decelerations in exports, in PCE, in nonresidential fixed investment, in state and local government spending, and in residential fixed investment that were partly offset by a deceleration in imports.

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 3.1 percent in the third quarter, compared with an increase of 2.2 percent (revised) in the second. The average of real GDP and real GDI, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 2.6 percent in the third quarter, compared with an increase of 3.0 percent (revised) in the second.

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 an upward revision to private inventory investment that was partly offset by downward revisions to PCE and to exports.

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 1.43 percent.

Note: The headline 2.1% GDP is 2.08% 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 14.3% 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 Q3 GDP Second Estimate of 2.1 percent was right at mainstream estimates and a slight improvement from the 1.5 percent of the Advance Estimate.

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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