Advance Estimate 4Q2020 GDP Is 4.0%

Written by Steven Hansen

The advance estimate for fourth-quarter 2020 Real Gross Domestic Product (GDP) is a positive 4.0 %. This growth is a significant slowing from the previous quarter’s growth of 33.4 % if one looks at quarter-over-quarter headline growth. The year-over-year rate of growth also significantly improved but remains in contraction.

The market expected (from Econoday):

Consider:

• 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 can be little more than wild guesses.
• Headline GDP is calculated by annualizing one quarter’s data against the previous quarter’s data. A better method would be to look at growth compared to the same quarter one year ago. For 4Q2020, the year-over-year growth is now -2.5 % – up from 3Q2020’s -2.8 % year-over-year. So one might say that the rate of GDP growth accelerated by 0.3 % from the previous quarter.

Real GDP Expressed As Year-over-Year Change

The same report also provides Gross Domestic Income (GDI) which in theory should equal Gross Domestic Product. Some have argued the discrepancy is due to misclassification of capital gains as ordinary income – but whatever the reason, there are differences.

Real GDP (blue line) Vs. Real GDI (red line) Expressed As Year-over-Year Change

Real GDP is inflation-adjusted and annualized – and Real GDP per capita was on a general upward trend until the pandemic cause recession hit.

Real GDP per Capita

The table below compares the previous quarter estimate of GDP (Table 1.1.2) with the current estimate this quarter which shows:

• consumption for goods and services growth slowed but added 1.7 % to GDP.
• trade balance improved but still removed 1.5 % from GDP
• inventories grew at a slower rate but added 1.0 % to GDP
• fixed investment growth slowed but added 3.0 % to GDP
• government spending growth improved but still removed 0.2 % from GDP

The following is Table 1.1.2: [click to enlarge]

z gdp_table.png

What the BEA says about this advance estimate:

The increase in fourth quarter GDP reflected both the continued economic recovery from the sharp declines earlier in the year and the ongoing impact of the COVID-19 pandemic, including new restrictions and closures that took effect in some areas of the United States. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the fourth quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified.

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

The increase in exports primarily reflected an increase in goods (led by industrial supplies and materials). The increase in nonresidential fixed investment reflected increases in all components, led by equipment. The increase in PCE was more than accounted for by spending on services (led by health care); spending on goods decreased (led by food and beverages). The increase in residential fixed investment primarily reflected investment in new single-family housing. The increase in private inventory investment primarily reflected increases in manufacturing and in wholesale trade that were partly offset by a decrease in retail trade.

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:

Caveats on the Use of Gross Domestic Product (GDP)

GDP is the 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 the 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 home costs (other than the new home purchase price even though mortgaged up to 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 did 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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