Third Estimate 1Q2014 GDP Falls to a Contraction of 2.9%

Written by Doug Short and Steven Hansen

The third estimate of first quarter 2014 Real Gross Domestic Product (GDP) is now a negative 2.9%.

• The market expected GDP at -2.4% to -1.0% (consensus -1.8%).
• This data point was +0.1% in the advance GDP estimate, and -1.0% in the second estimate.

If one wants to pick a single reason for the improvement of GDP between the second and third estimate – it was lower consumer spending on services – and significantly weaker exports and stronger imports.

This third estimate released today is based on more complete source data than were available for the “second” estimate issued last month. (See caveats below.)

Real GDP is inflation adjusted and annualized – the economy is both contracting in cumulative and on a per capita basis.

Real GDP per Capita

The table below compares the 4Q2013 third estimate of GDP (Table 1.1.2) with the advance, second and third estimate 1Q2014 GDP which shows:

• consumer consumption significantly weakened;
• trade balance worsened mostly due to declining exports and stronger imports;
• there was an inventory decline (negative for GDP but positive to the REAL economy);
• government drag on GDP continues but is less than 4Q2013.

The arrows in the table below show the improvement between the second and third estimate.

[click on graphic below to enlarge]

What the BEA says about the third estimate of 1Q2014 GDP:

In the second estimate, real GDP was estimated to have decreased 1.0 percent. With the third estimate for the first quarter, the increase in personal consumption expenditures (PCE) was smaller than previously estimated, and the decline in exports was larger than previously estimated.

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

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 1.3% (consensus 1.3%) versus the reported 1.3%. The following compares the GDP deflator to the Consumer Price Index:

What the BLS says about the revision from the second to the third estimate:

The downward revision to the percent change in real GDP primarily reflected downward revisions to personal consumption expenditures and to exports and an upward revision to imports.

In the same release, corporate profits data was released showing expansion in 1Q2014 :

Profits from current production (corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)) decreased $198.3 billion in the first quarter, in contrast to an increase of $47.1 billion in the fourth. The IVA decreased $33.2 billion, compared with a decrease of $0.5 billion. The CCAdj decreased $195.3 billion, compared with a decrease of $1.5 billion. The IVA and CCAdj convert inventory withdrawals and depreciation of fixed assets reported on a tax-return, historical-cost basis to the current-cost economic measures used in the national income and product accounts.

Taxes on corporate income increased $27.8 billion in the first quarter, compared with an increase of $13.3 billion in the fourth. Profits after tax with IVA and CCAdj decreased $226.0 billion, in contrast to an increase of $33.8 billion. The first-quarter changes in taxes on corporate income and in the CCAdj mainly reflect the expiration of bonus depreciation provisions. For further explanation, see the box below.

Dividends decreased $87.1 billion in the first quarter, in contrast to an increase of $90.5 billion in the fourth. Undistributed profits decreased $139.1 billion, compared with a decrease of $56.7 billion. Net cash flow with IVA — the internal funds available to corporations for investment — decreased $119.5 billion, compared with a decrease of $43.0 billion.

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 1.6 percent, down from 1.7 percent last quarter.

Here is the same chart with a linear regression that illustrates the gradual decline in GDP over this timeframe.

A particularly telling representation of slowing growth in the US economy is the year-over-year rate of change.

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 Q1 GDP Third Estimate of -2.9 percent was well below forecasts, although it’s likely that most mainstream economists will continue to write off the weakness as a transient result of a severe winter. Next month’s Advance Estimate of Q2 GDP will be of critical importance for economists expecting a strong economic rebound.

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.

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