Second Estimate 4Q2013 GDP Revised Down to 2.4%

Written by Doug Short and

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

  • The market expected GDP at 2.2% to 2.8% (consensus 2.5%).
  • This data point was 3.2% in the advance GDP estimate.

If one wants to pick a single reason for the downward revision of GDP between the advance and second estimate – it was lower personal consumption (aided by declining inventories).

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 has now recovered from the values before the Great Recession.

Real GDP per Capita

The table below compares the 3Q2013 GDP (Table 1.1.2) with the advance and second estimate 4Q2013 GDP which shows:

  • consumption expanded between the third and fourth quarters, but fell between the advance and second fourth quarter estimates;
  • trade balance (imports lower and exports were higher) worsened;
  • there was an inventory decline (negative for GDP but positive to the REAL economy);
  • government drag on GDP continues.

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 4Q2013 GDP:

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

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

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 1.2% to 1.4% (consensus is 1.3%) versus the reported 1.5%. 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 fourth-quarter percent change in real GDP is 0.8 percentage point, or $32.7 billion, less than the advance estimate issued last month, primarily reflecting downward revisions to personal consumption expenditures (PCE), to private inventory investment, to exports, and to state and local government spending that were partly offset by an upward revision to nonresidential fixed investment.

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 just below the half-way point between its 10-year moving average and 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 2.53 percent is off its interim low of 1.32 percent in Q1 of last year.

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 Second Estimate of 2.4 percent was fractionally lower than most forecasts. We will get the final estimate for Q4 GDP (aside from annual revisions) on March 27th.

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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