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Advance Estimate 4Q2013 GDP Is at Expectations

Written by Doug Short and

The advance estimate of fourth quarter 2013 Real Gross Domestic Product (GDP) grew a positive 3.2%.

  • The market expected the advance estimate 4Q2013 GDP at 3.0% to 3.6%.
  • GDP growth in 3Q2013 was 4.1%

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 has fully recovered from the last recession.

Real GDP per Capita

The table below compares the 3Q2013 third estimate of GDP with the advance estimate 4Q2013 GDP which shows:

  • changes to the trade balance (exports higher and imports lower) – this makes GDP higher as exports contribute to GDP while imports are subtracted from GDP;
  • there was a inventory decline – and lower inventories make lower GDP;
  • government spending overall was almost a 1% headwind to GDP;
  • and consumer spending growth was “much better” (growth accelerated).

[click on graphic below to enlarge]

What the BEA says about 2Q2013 GDP:

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

The deceleration in real GDP in the fourth quarter reflected a deceleration in private inventory investment, a larger decrease in federal government spending, a downturn in residential fixed investment, and decelerations in state and local government spending and in nonresidential fixed investment that were partly offset by accelerations in exports and in PCE and a deceleration in imports.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.2 percent in the fourth quarter, compared with an increase of 1.8 percent in the third. Excluding food and energy prices, the price index for gross domestic purchases increased 1.7 percent in the fourth quarter, compared with an increase of 1.5 percent in the third.

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 3.3 average (arithmetic mean) for the quarterly series since the 1947. I’ve also plotted the 10-year moving average, currently at 1.7. The current GDP is now nearly double this moving average and just 0.1 percent below its long-term 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 at 2.74 percent is off its interim low of 1.32 percent in Q1.

Click to View

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 Advance Estimate of 3.2 percent met or beat most economists’ forecasts and will be seen as a confirmation of the Fed’s decision to taper its asset purchases.

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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