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posted on 28 February 2017

Second Estimate 4Q2016 GDP Unchanged at 1.9 % - Under Expectations

Written by Doug Short / Jill Mislinski and Steven Hansen

The second estimate of fourth quarter 2016 Real Gross Domestic Product (GDP) remains a positive 1.9 %. Year-over-year growth was also unchanged from the advance estimate. There was some minor movement in the components of GDP - but the net affect did not change the advance estimate.

Analyst Opinion of GDP

Relatively, the consumer went limp, and GDP is gamed with inventory hocus-pocus and export-import adjustments. I am not a fan of quarter-over-quarter method of measuring GDP (as it exaggerates error) - but my year-over-year preferred method showed improvement from last quarter.

The market expected:

Seasonally Adjusted Quarter-over-Quarter Change at annual rate Consensus Range Consensus Advance Actual 2nd Estimate Actual
Real GDP 2.0 % to 3.1 % +2.1 % +1.9 % +1.9%
GDP price index 2.0 % to 2.1 % +2.1 % +2.1 % +1.9 %
  • Headline GDP is calculated by annualizing one quarter's data against the previous quarters data. A better method would be to look at growth compared to the same quarter one year ago. For 4Q2016, the year-over-year growth is 1.9 % - moderately up from 3Q2016's 1.7 % year-over-year growth. So one might say that the rate of GDP growth accelerated +0.2 % from the previous quarter.

The same report also provides Gross Domestic Income which in theory should equal Gross Domestic Product. Some have argued the discrepancy is due to misclassification of capital gains as ordinary income - but whatever the reason, there are differences.

Real GDP (blue line) Vs. Real GDI (red line) 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 previous quarter estimate of GDP (Table 1.1.2) with the advance estimate this quarter which shows:

  • consumption for goods and services decelerated..
  • trade balance declined and reduced GDP by 1.7% (imports grew and exports declined)
  • inventory change adding 0.94 % to GDP
  • except for inventory growth,there was little change in fixed investment growth
  • there was little change to government spending

The following is Table 1.1.2 before the annual revision: [click to enlarge]

What the BEA says about the second estimate of GDP:

Real gross domestic product (GDP) increased at an annual rate of 1.9 percent in the fourth quarter of 2016 (table 1), according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.5 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 also 1.9 percent. With the second estimate for the fourth quarter, the general picture of economic growth remains the same; the increase in personal consumption expenditures was larger and increases in state and local government spending and in nonresidential fixed investment were smaller than previously estimated.

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

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

The following compares the GDP deflator to the Consumer Price Index:

BLS explaination of the changes to GDP:

The percent change in real GDP was the same as previously estimated. An upward revision to PCE was offset by downward revisions to state and local government spending and to nonresidential fixed investment.

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 percentage 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 3.22% average (arithmetic mean) and the 10-year moving average, currently at 1.37%.

Quarterly GDP since 1947

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 14.8% below trend, the largest negative spread in the history of this series.

with a Regression

A particularly telling representation of slowing growth in the US economy is the year-over-year rate of change. The average rate at the start of recessions is 3.35%. Nine of the eleven recessions over this timeframe have begun at a higher level of real YoY GDP.

Real GDP Year-over-Year

In summary, the Q4 GDP Second Estimate of 1.9% was lower than expected and unchanged from the Advanced 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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