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Advance 4Q2011 GDP at 2.8% Is Weaker Than It Seems

by Steven Hansen and Doug Short

The advance estimate of fourth quarter 2011 Real Gross Domestic Product (GDP) is 2.8%

  • 3Q2011 GDP was 1.8%
  • 2011 Real GDP (the increase of 2011 over 2010) is 1.7%
  • The market expected 4Q2011 GDP at 3.2%.

This is the advance estimate of GDP which is based on incomplete data.  (See caveats below.)

Real GDP is inflation adjusted and annualized – the economy only grew moderately per capita, and per capita GDP is roughly slightly more than half recovered from the trough of the great recession.

The table below compares the composition of the prior releases of GDP with the advance estimate 4Q2011 GDP which shows:

  • the major headwinds are now the government (-0.93%) and imports (-0.75%).
  • the “good” news in this release is inventory stocking which contributed 1.94% of the 2.8% GDP growth.  This good news must be taken with a grain of salt, as it means part of future economic growth was taken in 4Q2011 (GDP is determined at point of manufacture, not point of sale).
  • consumers were moderately active in 4Q2011.

What the BEA says about this advance estimate:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.8 percent in the fourth quarter of 2011 (that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 1.8 percent.

The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4). The “second” estimate for the fourth quarter, based on more complete data, will be released on February 29, 2012.

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

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

Although on the surface 2.8% GDP growth is good – the reason for caution is that the 4Q2011 growth will likely not carry on into 1Q2012.  The economy is still searching for a driver in 2012.

Overview Analysis:

The Briefing.com consensus was for 3.2%. The 54 economists who responded to the January Wall Street Journal survey forecast 3.1% (average) 3.2% (median), with the single most frequent estimate (mode) of 3.5%

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, 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.  The Advance Estimate for Q4 GDP puts us a bit above halfway between the two.

Here is the same chart with a linear regression that illustrates the gradual decline in GDP over this time frame. The latest GDP number has moved above 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 Q4 GDP Advance Estimate of 2.8 came in below expectations, but it is a welcome improvement over the Final Estimate for Q3.  Now let’s hope it doesn’t follow the same path of downward revisions as its Q3 cousin.

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 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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