Second Estimate 1Q2013 GDP Revised Down to 2.4%, Corporate Profits Down

Written by Doug Short and

The second estimate of first quarter 2013 Real Gross Domestic Product (GDP) is now a positive 2.4%.

  • The market expected the second estimate 1Q2013 GDP at +2.5% to 2.7%.
  • If one wants to pick a single reason for decline of GDP between the advance and second estimate – it is a lower inventory buildup.

This data point was 2.5% in the advance GDP estimate.

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 expanded per capita, and per capita GDP still has not recovered from the values before the Great Recession.

Real GDP per Capita

The table below compares the 4Q2012 third estimate of GDP (Table 1.1.2) with the advance and second estimate 1Q2013 GDP which shows:

  • shrinking trade balance (both imports and exports were lower)
  • there was an inventory buildup (which is not necessarily a good thing) – but the buildup was reduced in the second estimate;
  • and consumer spending on services surged (second estimate shows strengthening spending on goods).

[click on graphic below to enlarge]

What the BEA says about the second estimate of 1Q2013 GDP:

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, residential fixed investment, nonresidential fixed investment, and exports 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, a smaller decrease in federal government spending, and an upturn in exports 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:

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 0.1 percentage point, or $3.9 billion, less than the advance estimate issued last month, primarily reflecting downward revisions to private inventory investment, to exports, and to state and local government spending that were partly offset by a downward revision to imports and an upward revision to personal consumption expenditures.

In the same release, corporate profits data was released showing contraction (and corporations paid less taxes)  in 1Q2013:

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) decreased $43.8 billion in the first quarter, in contrast to an increase of $45.4 billion in the fourth. Current-production cash flow (net cash flow with inventory valuation adjustment) – – the internal funds available to corporations for investment — increased $110.9 billion in the first quarter, in contrast to a decrease of $89.8 billion in the fourth.

Taxes on corporate income decreased $13.6 billion in the first quarter, compared with a decrease of $4.4 billion in the fourth. Profits after tax with inventory valuation and capital consumption adjustments decreased $30.2 billion in the first quarter, in contrast to an increase of $49.8 billion in the fourth. Dividends decreased $101.7 billion in contrast to an increase of $124.3 billion. The large fourthquarter 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 increased $71.4 billion, in contrast to a decrease of $74.3 billion.

Domestic profits of financial corporations decreased $2.0 billion in the first quarter, compared with a decrease of $3.5 billion in the fourth. Domestic profits of nonfinancial corporations decreased $8.8 billion in the first quarter, in contrast to an increase of $24.8 billion in the fourth. In the first quarter, real gross value added of nonfinancial corporations increased, and profits per unit of real value added decreased. The decrease in unit profits reflected an increase in the unit nonlabor costs incurred by corporations that was partly offset by a decrease in unit labor costs; unit prices were unchanged.

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, here is a look at GDP by party in control of the White House and Congress.

In summary, the Q2 GDP Second Estimate of 2.4 percent was a rather insignificant adjustment to the downside, but the mainstream consensus was that it would remain unchanged at 2.5 percent.

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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