Third Estimate 2Q2012 GDP Revised Down to 1.3%

Written by Steven Hansen and Doug Short

The third estimate of first quarter 2012 Real Gross Domestic Product (GDP) has been significantly revised down from 1.7% to 1.3%. The market expected the third estimate 2Q2012 GDP growth at 1.7%.

GDP was much worse than expected – and the significant change in this estimate was inventory depletion (not necessarily bad news). Their was little good news in this release except that GDP was positive.

So, GDP overall shows a slowing economy at the end of the 2Q2012.

This third estimate released today is based on more complete source data than were available for the “second” estimate issued last month. (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.

Real GDP per Capita

The table below compares the composition of the prior releases of GDP with the third estimate 2Q2012 GDP which shows:

  • the consumer has slowed buying services, but with services still contributed two-thirds of GDP growth;
  • there is no inventory buildup – in fact this shows inventory contracted;
  • exports remain a significant element the USA GDP, however it weakened.

What the BEA says about 1Q2012 GDP:

The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, and residential fixed investment 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 deceleration in real GDP in the second quarter primarily reflected decelerations in PCE, in nonresidential fixed investment, and in residential fixed investment that were partly offset by smaller decreases in federal government spending and in state and local government spending and an acceleration in exports.

Motor vehicle output added 0.20 percentage point to the second-quarter change in real GDP after adding 0.72 percentage point to the first-quarter change. Final sales of computers subtracted 0.10 percentage point from the second-quarter change in real GDP after adding 0.02 percentage point to the first-quarter change.

Inflation continues to moderate as the “deflator” which adjusts the current value GDP to a “real” comparable value continues to moderate. The following compares the GDP deflator to the Consumer Price Index:

What the BLS says about the revision from the second to the third estimate:

The “third” estimate of the second-quarter percent change in real GDP is 0.4 percentage point, or $16.0 billion, less than the “second” estimate issued last month, primarily reflecting downward revisions to private inventory investment, to personal consumption expenditures, and to exports.

In the same release, corporate profits data was released showing a larger increase in 2Q2012:

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $21.8 billion in the second quarter, in contrast to a decrease of $53.0 billion in the first quarter. Current-production cash flow (net cash flow with inventory valuation adjustment) — the internal funds available to corporations for investment — increased $6.0 billion in the second quarter, in contrast to a decrease of $169.8 billion in the first.

Taxes on corporate income decreased $10.3 billion in the second quarter, in contrast to an increase of $83.2 billion in the first. Profits after tax with inventory valuation and capital consumption adjustments increased $31.9 billion in the second quarter, in contrast to a decrease of $136.2 billion in the first. Dividends increased $20.4 billion, compared with an increase of $9.2 billion; current production undistributed profits increased $11.6 billion, in contrast to a decrease of $145.5 billion.

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. 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 3.2 average (arithmetic mean) for the quarterly series since the 1947, with the latest GDP revisions, this number had been at 3.3 for 14 quarters, but slipped to 3.2 as of the current quarter. I’ve also plotted the 10-year moving average, currently at 1.7. The current GDP now has us below 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 well 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 Q2 GDP Third Estimate of 1.3% underscores the trend of a weak post-recession recovery — now in its twelfth quarter after the end of the last recession.

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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