Second Estimate 3Q2011 GDP Disappoints: Revised Down to 2.0%

by Steven Hansen and Doug Short

The second estimate of third quarter 2011 Gross Domestic Product (GDP) is 2.0% – up from 2Q2011 GDP of 1.3% and down from the advance 3Q2011 estimate of 2.5%. The market expected 2.3% to 2.5%. This is the second estimate, which is based on  more complete data and is still subject to revision.

This second estimate 3Q2011 GDP of 2.0% is inflation adjusted and annualized – the economy only grew marginally per capita and is roughly half recovered from the trough of the great recession.

The table below compares the composition of the advance 3Q2011 GDP with the second estimate 3Q2011 GDP which shows:

  • although there was some deterioration in personal consumption expenditure (particularly in non-durable goods) and government spending – the deterioration was not significant.
  • the major headwind causing the drop between the advance and second estimate of GDP was private domestic investment (specifically shrinking inventories).
  • exports are now higher than first estimated while imports less than first estimated (imports are subtracted from GDP) – offsetting all the deterioration in personal consumption and government spending, and some of the private domestic investment.

Comparing the second estimate of 3Q2011 GDP to 2Q2011:

  • Personal consumption is growing faster than population growth – but growth is still weak;
  • The government now is a slight headwind to GDP growth;
  • Imports have shrunk and exports grew (exports add while imports subtract from GDP) for a modest improvement;
  • Investment now is a drag on GDP.

What the BEA says about this 2nd estimate:

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

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

Final sales of computers added 0.22 percentage point to the third-quarter change in real GDP after adding 0.07 percentage point to the second-quarter change. Motor vehicle output added 0.18 percentage point to the third-quarter change in real GDP after subtracting 0.10 percentage point from the second-quarter change.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.9 percent in the third quarter, 0.1 percentage point less than in the advance estimate; this index increased 3.3 percent in the second quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.8 percent in the third quarter, compared with an increase of 2.7 percent in the second.

The bottom line summary in 3Q2011 versus 2Q2011 is there are no growth trend lines. The only 3 quarter trend is a less good on Gross Private Domestic Investment. On a per capita basis, the economy is at 2005 levels.

Overview Analysis:

Here is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. To be more precise, what the lower half of the chart shows is the percent change from the preceding period in Real (inflation-adjusted) Gross Domestic Product.  Also included are recessions, which are determined by the National Bureau of Economic Research (NBER).

Here is a close-up of GDP alone with a line to illustrate the 3.3 average (arithmetic mean) for the quarterly series since the 1947. I’ve also plotted the 10-year moving average, currently at 1.7. It’s some consolation that the Q3 GDP Second Estimate remains above that moving average.

Here is the same chart with a linear regression that illustrates the gradual decline in GDP over this timeframe. The latest GDP number is slightly below the approximate 2.1 of the regression at the same position on the horizontal axis.

And for a bit of political trivia in this post-election period, here is a look a GDP by party in control of the White House and Congress.

In summary, the Q3 GDP Second Estimate of 2.0 is substantially below the long-term 3.3 GDP average and a disappointing downward revision from the Advance Estimate.

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.

Consider that GDP includes the costs of suing your neighbor or McDonalds 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 in 2011, 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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