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posted on 29 November 2017

Second Estimate 3Q2017 GDP Growth Improves to 3.3 %

Written by Steven Hansen

The headline second estimate of third quarter 2017 Real Gross Domestic Product (GDP) was increased to a positive 3.3 % from the advance estimate's 3.0 %. Year-over-year growth was unchanged from the advance estimate.

Analyst Opinion of GDP

The consumer spending declined, but the real improvement came from fixed investment. 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

Second

Actual

Third

Actual

Real GDP 2.8 % to 3.5 % 3.3 % +3.0 % +3.3 %
GDP price index 2.1 % to 2.2 % 2.2 % +2.2 % +2.1 %
Real Consumer Spending - Q/Q change 2.4 % to 3.0 % 2.5 % +2.4 % +2.3 %

  • 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 3Q2017, the year-over-year growth is now 2.3 % - up marginally from 2Q2017's 2.2 % year-over-year growth (but unchanged between the advance and second estimates). So one might say that the rate of GDP growth improved 0.1 % 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 current estimate this quarter which shows:

  • consumption for goods and services improved adding 1.6% to GDP.
  • trade balance added 0.4% to GDP
  • inventory change added 0.8% to GDP
  • fixed investment growth added 0.4% to GDP
  • federal spending insignificantly grew

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 3.3 percent in the third quarter of 2017 (table 1), according to the "second" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.1 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 3.0 percent. With this second estimate for the third quarter, the general picture of economic growth remains the same; nonresidential fixed investment, state and local government spending, and private inventory investment were revised up from the prior estimate.

Real gross domestic income (GDI) increased 2.5 percent in the third quarter, compared with an increase of 2.3 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 2.9 percent in the third quarter, compared with an increase of 2.7 percent in the second quarter.

The increase in real GDP in the third quarter reflected positive contributions from PCE, private inventory investment, nonresidential fixed investment, and exports that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.

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

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 revised up from the advance estimate, reflecting upward revisions to nonresidential fixed investment, state and local government spending, and private inventory investment.

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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