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posted on 26 February 2016

Second Estimate 4Q2015 GDP Revised Upward to 1.0%

Written by Doug Short and Steven Hansen

The second estimate of fourth quarter 2015 Real Gross Domestic Product (GDP) is a positive 1.0 %. This is a moderate increase from the advance estimate's +0.7 % 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 an improvement in the contraction of inventories.

The market expected:

Seasonally Adjusted Quarter-over-Quarter Change at annual rate Consensus Range Consensus Advance Actual 2nd Estimate Actual
Real GDP 0.2 % to 0.8 % +0.4 % +0.7 % +1.0 %
GDP price index 0.8 % to 0.9 % +0.8 % +0.8 % +0.9 %

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 4Q2015, the year-over-year growth is 1.9 % - down from 3Q2015's 2.1 % 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 per Capita

The table below compares the 3Q2015 third estimate of GDP (Table 1.1.2) with the second estimate of 4Q2015 GDP which shows:

  • consumption for goods and services declined.
  • trade balance degraded
  • there was inventory change removing 0.14% from GDP
  • there was slower fixed investment growth
  • there was reduction in government spending

The arrows in the table below highlight significant differences between 3Q2015 and 4Q2015 (green is good influence, and red is a negative influence).

from the advance estimate

[click on graphic below to enlarge]

from the second estimate:

[click on image 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 1.0 percent in the fourth quarter of 2015, according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.0 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 0.7 percent. With this second estimate for the fourth quarter, the general picture of economic growth remains the same; private inventory investment decreased less than previously estimated

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

The deceleration in real GDP in the fourth quarter primarily reflected a deceleration in PCE and downturns in nonresidential fixed investment, in state and local government spending, and in exports that were partly offset by a smaller decrease in private inventory investment, a downturn in imports, and an acceleration in federal government spending.

Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- increased 1.2 percent in the fourth quarter, compared with an increase of 2.2 percent in the third.

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 4Q2015 GDP:

The upward revision to the percent change in real GDP primarily reflected an upward revision to private inventory investment and a downward revision to imports that were partly offset by downward revisions to state and local government spending and to personal consumption expenditures

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 1.40 percent.

Note: The headline 1.0% GDP is 1.01% 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 14.7% 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 Q4 GDP Second Estimate of 1.0 percent was better than most mainstream estimates and above the 0.7 percent 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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