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Advance Estimate 4Q2012 GDP Is Economic Contraction of 0.1%

Written by Doug Short and

The advance estimate of fourth quarter 2013 Real Gross Domestic Product (GDP) is negative 0.1%.

  • The market expected the advance estimate 4Q2012 GDP at +0.1% to 1.0%.
  • Government spending and exports contracted, but the consumer remained at the trough.

This data point is a nasty surprise.

This advance estimate released today is based on source data that are incomplete or subject to further revision. (See caveats below.)  Please note that historically advance estimates have turned out to be no more than wild guesses.

Real GDP is inflation adjusted and annualized – the economy did not grow per capita, and per capita GDP did not fully recover from the last recession.

Real GDP per Capita

The table below compares the 3Q2012 third estimate of GDP with the advance and second estimate 3Q2012 GDP which shows:

  • changes to the trade balance (exports higher, imports lower) – and a strengthening of consumer spending for services caused this increase form 2.7% to 3.1%
  • the big difference between 2Q2012 and 3Q2012 is the inventory build which will be a headwind in 4Q2012;

[click on graphic below to enlarge]

What the BEA says about 3Q2012 GDP:

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

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

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:

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 has now removed us completely from either range.

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 Q4 GDP Advance Estimate of minus 0.1 percent, is a shocking plunge into shallow contraction, a move that was quite unexpected by mainstream economists. On February 28th we’ll get the Second Estimate, which often shows a significant revision from the Advance Estimate. Those of us who follow GDP closely will be on proverbial pins and needles waiting for the next update.

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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