Advance 1Q2012 GDP: Economy Soft but Consumer Remains at Trough

Written by Steven Hansen and Doug Short

The advance estimate of first quarter 2012 Real Gross Domestic Product (GDP) is 2.2%

  • 3Q2011 GDP was 1.8%
  • 4Q2012 GDP was 3.0%
  • Annual GDP growth for 2011 was 1.7% (calendar year 2011 over calendar year 2010)
  • The market expected 1st estimate 1Q2012 GDP at 2.5% to 2.6%.

As Econintersect had previously warned in the 4Q2011, there were negative connotations in the data which were indicating a slowing growth.  The good news is that the consumer strengthened spending.

  • Both exports and imports grew almost offsetting each other.
  • Investment was comparatively weak  -and non-residential structures should be considered a headwind.
  • State and local governments seem to be spending – but Federal government spending was the other major headwind in 1Q2012.

The first-quarter advance estimate released today is based on source data that are incomplete or subject to further revision. (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 1Q2012 GDP which shows:

  • the major headwind to GDP remains the government (-0.60%).
  • consumers were moderately active in 1Q2012 – contributing literally all the growth.

What the BEA says about 1Q2012 GDP:

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

The deceleration in real GDP in the first quarter primarily reflected a deceleration in private inventory investment and a downturn in nonresidential fixed investment that were partly offset accelerations in PCE and in exports.Motor vehicle output added 1.12 percentage points to the first-quarter change in real GDP after adding 0.47 percentage point to the fourth-quarter change. Final sales of computers added 0.05 percentage point to the first-quarter change in real GDP after adding 0.12 percentage point to the fourth quarter change.

This long after the end of the recession, the USA still remains in a 2%+ economy.  Yes it is growth, the the growth sucks.

Overview Analysis:

The Advance Estimate for Q1 GDP came in at 2.2%, down from 3.0% in the previous quarter, which was below most mainstream media estimates. The consensus at was for 2.5%, and’s own estimate was for 2.9%. However, today’s number exactly matched the median and mean of the forecasts of 51 economists who responded to the Wall Street Journal April survey, which was reported on last week.

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. I’ve also plotted the 10-year moving average, currently at 1.7. The Advance Estimate for Q1 GDP puts us closer to the 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 very close to 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 Q1 GDP Advance Estimate of 2.2% came in below mainstream expectations but on target with the median and mean forecasts of the WSJ survey.

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 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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