Second Estimate 3Q2012 GDP Improved Because of Inventory Growth

Written by Steven Hansen and Doug Short

The second estimate of third quarter 2012 Real Gross Domestic Product (GDP) is 2.7% – up from the advanced estimate of 2.0%.

  • 3Q2011 GDP was 1.3%, 4Q2011 GDP was 4.1%, and 1Q2012 GDP was 2.0%, and 2Q2012 GDP was 1.3%
  • The market expected the second estimate 3Q2012 GDP at 2.8%.

For those that are thinking the economy is beginning to rev up – most of the GDP “improvement” from 2.0% to 2.8% was due to inventories building up – and the consumer’s contribution is “less good”.

This second estimate released today is based on more complete source data than were available for the “advance” 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 advance 3Q2012 estimate of GDP with the second estimate 3Q2012 GDP which shows:

  • the consumer’s contribution to GDP was down from what was first estimated, but the growth is on par with 2Q2012;
  • the big gain in GDP was due to inventory build – not something that is good in a slowing economy;
  • export’s contribution to GDP is now on par with other quarters in 2012.

What the BEA says about 3Q2012 GDP:

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

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

Final sales of computers added 0.12 percentage point to the third-quarter change in real GDP after subtracting 0.10 percentage point from the second-quarter change. Motor vehicle output subtracted 0.24 percentage point from the third-quarter change in real GDP after adding 0.20 percentage point to the second-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 advance to the second estimate:

The “second” estimate of the third-quarter percent change in GDP is 0.7 percentage point, or $21.9 billion, more than the advance estimate issued last month, primarily reflecting upward revisions to private inventory investment and to exports that were partly offset by downward revisions to personal consumption expenditures (PCE) and to nonresidential fixed investment.

In the same release, corporate profits data was released showing continuing growth in 3Q2012:

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $67.3 billion in the third quarter, compared with an increase of $21.8 billion in the second quarter.  Current-production cash flow (net cash flow with inventory valuation adjustment) — the internal funds available to corporations for investment — increased $45.0 billion in the third quarter, compared with an increase of $6.0 billion in the second.

Taxes on corporate income increased $19.3 billion in the third quarter, in contrast to a decrease of $10.3 billion in the second.  Profits after tax with inventory valuation and capital consumption adjustments increased $48.1 billion in the third quarter, compared with an increase of $31.9 billion in the second.  Dividends increased $11.3 billion compared with an increase of $20.4 billion; current- production undistributed profits increased $36.8 billion, compared with an increase of $11.6 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 Q2 of this year. I’ve also plotted the 10-year moving average, currently at 1.7. The current GDP now has us above the moving average but still below the 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 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 pre-election period, here is a look at GDP by party in control of the White House and Congress.

In summary, the Q3 GDP Second Estimate of 2.7%, is a welcome move in the right direction in the wake of the subnormal trend of the post-recession recovery — now in its thirteenth 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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