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Advance Estimate 1Q2013 GDP Is 2.5%

Written by Doug Short and

The advance estimate of first quarter 2013 Real Gross Domestic Product (GDP) is positive 2.5% – up from 0.2% in 4Q2012.

  • The market expected the advance estimate 1Q2013 GDP at +2.8% to 3.2%.
  • Government spending and exports contracted, but the consumer remained at the trough.

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 little more than wild guesses.

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

Real GDP per Capita

The table below compares the 4Q2012 third estimate of GDP with the advance estimate 1Q2013 GDP which shows:

  • changes to the trade balance (exports higher but imports were significantly higher)
  • there was an inventory buildup which is not necessarily a good thing;
  • and consumer spending on services surged.

[click on graphic below to enlarge]

What the BEA says about 1Q2013 GDP:

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

The acceleration in real GDP in the first quarter primarily reflected an upturn in private inventory investment, an acceleration in PCE, an upturn in exports, and a smaller decrease in federal government spending that were partly offset by an upturn in imports and a deceleration in nonresidential fixed investment.

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 in Q2 of 2012 year. I’ve also plotted the 10-year moving average, currently at 1.7. The current GDP is now about midway between the two.

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 in this pre-election period, here is a look at GDP by party in control of the White House and Congress.

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

In summary, the Q1 GDP Advance Estimate of 2.5 percent is a welcome improvement over the 0.4 percent of previous quarter even though mainstream economists were looking for something closer to 3.0 percent.

For an alternate historical view of the economy, here is a chart of real GDP per-capita growth since 1960. For this analysis I’ve chained in today’s dollar for the inflation adjustment. The per-capita calculation is based on quarterly aggregates of mid-month population estimates by the Bureau of Economic Analysis, which date from 1959 (hence my 1960 starting date for this chart, even though quarterly GDP has is available since 1947). The population data is available in the FRED series POPTHM. The logarithmic vertical axis ensures that the highlighted contractions have the same relative scale.

Here is an exponential regression through the data using the Excel GROWTH() function to give us a sense of the historical trend. The regression illustrates the fact that the trend since the Great Recession has a visibly lower slope than long-term trend. In fact, the current GDP per-capita is 11.6% below the regression trend.

The real per-capita series gives us a better understanding of the depth and duration of GDP contractions. As we can see, since our 1960 starting point, the recession that began in December 2007 is associated with a deeper trough than previous contractions, which perhaps justifies its nickname as the Great Recession. In fact, at this point, 20 quarters beyond the 2007 GDP peak, real GDP per capita is still 1.04% off the all-time high following the deepest trough in the series.

Here is a more revealing snapshot of real GDP per capita, specifically illustrating the percent off the most recent peak across time, with recessions highlighted. The underlying calculation is to show peaks at 0% on the right axis. The callouts shows the percent off real GDP per-capita at significant troughs as well as the current reading for this metric.

Quarterly GDP Compounded Annual Rate of Change

The standard measure of GDP in the US is expressed as the compounded annual rate of change from one quarter to the next. The current real GDP as of the Q1 Advance Estimate is 2.5 percent. But with a per-capita adjustment, the data series is quite different. The real per-capita GDP is currently at 1.7 percent (rounded from 1.73 percent). Both a 10-year moving average and the slope of a linear regression through the data show that the US economic growth has been slowing for decades.

How do the two compare, GDP and GDP per capita? Here is an overlay of the two in the 21st century.

To expand on the illustration above: Since 1960 mean (average) GDP is 3.1 percent. Mean GDP per capita is 2.0 percent.

Year-Over-Year (YoY) GDP Percent Change and Recession Risk

Economists and financial journalists vary widely in their opinions about the present-day level of recession risk. The official call on recessions, of course, is the domain of the National Bureau of Economic Research, which makes the determination on recession start and end several months — sometimes more than a year — after the fact.

GDP per capita, as we’ve seen, is a weaker series than GDP. What does it suggest about our current recession risk? The next chart shows the YoY change in real GDP per capita since 1960. I’ve again highlighted recessions. The red dots show the YoY real GDP for the quarter before the recession began, and the dotted line gives us a sense of how the current level compares to recession starts since 1960. This chart suggests that, despite the obvious weakness in the economy, this indicator is not recessionary. That said, we must remember that GDP is a lagging indicator of the economy, and the annual GDP revisions in July will almost certainly change the latest data points.

As the chart illustrates, the latest YoY real GDP per capita, at 1.05% is higher than the level at the onset of all the recessions in this series with one exception — the second and more painful half of the early 1980′s double dip. That recession was a outlier in that it was to some extent knowingly engineered by the Fed (then Chairman Paul Volcker), an inevitable side-effect of raising the Fed Funds Rate above 19 percent to break the back of the stagflation of the era. Here is a snapshot that illustrates the extreme Fed maneuver.

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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