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posted on 28 September 2017

Third Estimate 2Q2017 GDP Improves to 3.1%. Corporate Profits Up.

Written by Steven Hansen

The third estimate of first quarter 2017 Real Gross Domestic Product (GDP) increased marginally to 3.1 %.

Analyst Opinion of GDP

The consumer spending improved, but the real improvement came from using a lower inflation deflator. I am not a fan of quarter-over-quarter exaggerated method of measuring GDP - but my year-over-year preferred method showed moderate acceleration from last quarter.

The market expected:

Seasonally Adjusted Quarter-over-Quarter Change at annual rate Consensus Range Consensus Advance Actual 2nd Estimate Actual 3rd
Estimate Actual
Real GDP 2.8 % to 3.2 % 3.1 % +2.6 % +3.0 % +3.1 %
GDP price index 1.0 % to 1.0 % 1.0 % +1.0 % +1.0 % +1.0 %
Real Consumer Spending 3.1 % to 3.3 % 3.3 % +2.8 % +3.3 % +3.3 %

  • 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 2Q2017, the year-over-year growth is now 2.2 % - up marginally from 1Q2017's 2.0 % year-over-year growth. So one might say that the rate of GDP growth improved from the previous quarter.

Real GDP Expressed As Year-over-Year Change

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 third estimate released today is based on more complete source data than were available for the "second" estimate issued last month. (See caveats below.)

Real GDP is inflation adjusted and annualized - the economy improved on a per capita basis.

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 improved adding 2.2% to GDP.
  • trade balance was little changed
  • inventory change had little affect on GDP
  • fixed investment growth added 0.5% to GDP
  • federal spending insignificantly decline

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

What the BEA says about the third estimate of GDP:

Real gross domestic product (GDP) increased at an annual rate of 3.1 percent in the second quarter of 2017 (table 1), according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 1.2 percent. The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 3.0 percent. With this third estimate for the second quarter, private inventory investment increased more than previously estimated, but the general picture of economic growth remains the same.

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 implicit price deflator year-over-year growth to the Consumer Price Index [this puts both on the same basis for comparision]:

What the BLS says about the revision from the second to the third estimate:

The revision to the percent change in real GDP primarily reflected an upward revision to private inventory investment.

In the same release, corporate profits data was released showing less growth.

Profits from current production (corporate profits with inventory valuation adjustment and capital consumption adjustment) increased $14.4 billion in the second quarter, in contrast to a decrease of $46.2 billion in the first quarter.

Profits of domestic financial corporations decreased $33.8 billion in the second quarter, compared with a decrease of $40.7 billion in the first. Profits of domestic nonfinancial corporations increased $59.1 billion, compared with an increase of $3.8 billion. Rest-of-the-world profits decreased $10.8 billion, compared with a decrease of $9.3 billion. In the second quarter, receipts increased $5.5 billion, and payments increased $16.3 billion.

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, 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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