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Third Estimate 4Q2012 GDP Is Economic Expansion of 0.4%, Corporate Profits Up

Written by Doug Short and

The third estimate of fourth quarter 2013 Real Gross Domestic Product (GDP) is now a positive 0.4%.

  • The market expected the third estimate 4Q2012 GDP at +0.3%.
  • If one wants to pick a single reason for improvement of GDP between the advance and second estimate – it is that domestic fixed investment improved.

This data point was initially reported as negative 0.1% in the advance GDP estimate, and was revised upward to positive 0.1% in the second estimate released last month.

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 contracted 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 3Q2012 third estimate of GDP with the advance, second and third estimate 4Q2012 GDP which shows:

  • domestic investment improved – specifically non-residential structures.
  • the exim balance improved with both imports weakening and exports strengthening.
  • personal consumption for services worsened significantly

[click on graphic below to enlarge]

What the BEA says about the third estimate of 4Q2012 GDP:

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

The deceleration 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:

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

The “third” estimate of the fourth-quarter percent change in real GDP is 0.3 percentage point, or $8.6 billion, more than the second estimate issued last month, primarily reflecting upward revisions to nonresidential fixed investment and to exports that were partly offset by a downward revision to personal consumption expenditures.

In the same release, corporate profits data was released showing continuing growth (even though corporations paid less taxes)  in 4Q2012:

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $45.4 billion in the fourth quarter, compared with an increase of $45.7 billion in the third quarter. Current-production cash flow (net cash flow with inventory valuation adjustment) — the internal funds available to corporations for investment — decreased $89.8 billion, in contrast to an increase of $32.5 billion.

Taxes on corporate income decreased $4.4 billion in the fourth quarter, in contrast to an increase of $9.1 billion in the third. Profits after tax with inventory valuation and capital consumption adjustments increased $49.8 billion, compared with an increase of $36.7 billion. Dividends increased $124.3 billion, compared with an increase of $12.8 billion. The large fourth-quarter increase reflected accelerated and special dividends paid by corporations at the end of 2012 in anticipation of changes to individual income tax rates. Current-production undistributed profits decreased $74.3 billion, in contrast to an increase of $23.8 billion.

Domestic profits of financial corporations decreased $3.5 billion in the fourth quarter, in contrast to an increase of $68.1 billion in the third. Domestic profits of nonfinancial corporations increased $24.8 billion, in contrast to a decrease of $14.1 billion. In the fourth quarter, real gross value added of nonfinancial corporations increased, and profits per unit of real value added increased. The increase in unit profits reflected decreases in both the unit labor and unit nonlabor costs incurred by corporations that were partly offset by a decrease in unit prices.

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 in Q2 of 2012 year. I’ve also plotted the 10-year moving average, currently at 1.7. The current GDP has now removed us completely from either level.

Here is the same chart with a linear regression that illustrates the gradual decline in GDP over this timeframe.

And for a bit of political trivia, here is a look at GDP by party in control of the White House and Congress.

In summary, the Q4 GDP Third Estimate of 0.4 percent was a small improvement over the Advance Estimate, but it is substantially below long-term trends.

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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