by Steven Hansen and Doug Short
The third estimate of third quarter 2011 Real Gross Domestic Product (GDP) is 1.8%
- 2Q2011 GDP was 1.3%
- the advance 3Q2011 estimate was 2.5%
- the second 3Q2011 estimate was 2.0%
The market expected 2.0%. This is the third estimate, which is based on more complete data.
This third estimate 3Q2011 Real GDP is inflation adjusted and annualized – the economy only grew marginally per capita and per capita is roughly half recovered from the trough of the great recession.
The table below compares the composition of the prior releases of 3Q2011 GDP with the third estimate 3Q2011 GDP which shows:
- the major headwind in the third estimate was the downward revision of the service portion of Personal Consumption expenditure, and more than explains the entire downward adjustment of this third estimate.
- Private inventories which caused the headwinds in the second estimate, recovered somewhat and offset some of the contraction of the service portion of Personal Consumption Expenditures.
- there was little change to exports or government contributions.
Comparing the third estimate of 3Q2011 GDP to 2Q2011:
- Personal consumption is barely growing faster than population growth – and was the lowest growth in 7 quarters;
- The government remains 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 nonresidential fixed investment, personal consumption expenditures (PCE), 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, in nonresidential fixed investment, and in exports, and a smaller decrease in state and local government spending 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 0.12 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 2.0 percent in the third quarter, 0.1 percentage point more than the second 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 is that GDP remains unbelievably weak, although has improved every quarter of 2011.
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. I’ve also included 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. Also plotted is the 10-year moving average, currently at 1.7. It’s small consolation that the Q3 GDP Third Estimate remains 0.1% above that moving average.
Here is the same chart with a linear regression that illustrates the gradual decline in GDP over this time frame. The latest GDP number is 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 Third Estimate of 1.8 is little more than half the long-term 3.3 GDP average and a second 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.