The second estimate of third quarter 2013 Real Gross Domestic Product (GDP) is now a positive 3.6%.
- The market expected GDP at +3.0% to 3.1%.
- This data point was 2.8% in the advance GDP estimate.
If one wants to pick a single reason for the improvement of GDP between the advance and second estimate – it is higher inventories which is not necessarily economically positive. GDP is counted at point of production – not point of sale for manufactured goods.
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 now recovered from the values before the Great Recession.
Real GDP per Capita
The table below compares the 2Q2013 third estimate of GDP (Table 1.1.2) with the advance and second estimate 3Q2013 GDP which shows:
- consumption declined slightly;
- shrinking trade balance (imports lower and exports were higher);
- there was an inventory buildup (which is not necessarily a good thing);
- government does not present much of a drag on GDP.
The arrows in the table below show the improvement between the advance and second estimate.
[click on graphic below to enlarge]
What the BEA says about the second estimate of 3Q2013 GDP:
The increase in real GDP in the third quarter primarily reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), exports, nonresidential fixed investment, residential fixed investment, and state and local government spending that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.
The acceleration in real GDP growth in the third quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and an acceleration in state and local government spending that were partly offset by decelerations in exports, in PCE, and 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 market expected the deflator at 1.8% to 1.9% versus the reported 2.0%. 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 upward revision to the percent change in real GDP primarily reflected upward revisions to private inventory investment and to nonresidential fixed investment that were partly offset by an upward revision to imports and a downward revision to exports.
In the same release, corporate profits data was released showing expansion in 3Q2013:
Profits from current production (corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)) increased $38.3 billion in the third quarter, compared with an increase of $66.8 billion in the second. Taxes on corporate income decreased $4.8 billion, in contrast to an increase of $10.0 billion. Profits after tax with IVA and CCAdj increased $43.0 billion, compared with an increase of $56.9 billion.
Dividends decreased $179.7 billion in the third quarter, in contrast to an increase of $273.5 billion in the second. The large third-quarter decrease primarily reflected dividends paid by Fannie Mae to the federal government in the second quarter. Undistributed profits increased $222.8 billion, in contrast to a decrease of $216.6 billion. Net cash flow with IVA — the internal funds available to corporations for investment — increased $234.5 billion, in contrast to a decrease of $205.3 billion.
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 3.3 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, slipped to 3.2 in Q4 of 2012, and is now back to 3.3. I’ve also plotted the 10-year moving average, currently at 1.7, down from 1.8 last quarter. The current GDP is now over double this moving average.
Here is the same chart with a linear regression that illustrates the gradual decline in GDP over this timeframe.
Perhaps the most telling representation of slowing growth in the US economy is the year-over-year rate of change. The latest data point is off its interim low of 1.32 percent in Q1, but it remains lower than the onset of all recessions except the ones that began in 1980 and 1990.
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 Q3 GDP Second Estimate of 3.6 was better that forecast.
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.
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.