Written by Doug Short and Steven Hansen
The third estimate of second quarter 2014 Real Gross Domestic Product (GDP) is now a positive 4.6%.
- The market expected GDP at 4.3 to 5.0% (consensus 4.6%).
- This data point was +4.0% in the advance GDP estimate, and 4.2% in the second estimate.
Headline GDP is calculated by annualizing one quarter’s data against the previous quarters data (and the previous quarter was terrible in this instance). A better method would be to look at growth compared to the same quarter one year ago. For 2Q2014, the year-over-year growth is 2.6% – up from 1Q2014’s 1.9% year-over-year growth. So one might say that GDP growth accelerated 0.7% from the first quarter.
If one wants to pick the main reasons for the improvement of GDP between the second and third estimate – it was increased fixed investment and improved trade balance.
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 improved on a cumulative and on a per capita basis.
Real GDP per Capita
The table below compares the 1Q2014 third estimate of GDP (Table 1.1.2) with the advance, second and third estimate 2Q2014 GDP which shows:
- consumption for goods and services has improved;
- trade balance again worsened (but improved between the advance, 2nd and 3rd estimate);
- there was an inventory growth adding over 1.4% to GDP;
- fixed investment improved;
- government spending actually added to GDP.
The arrows in the table below show the improvement (green arrows) or decline (red arrows) 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, the increase in real GDP was 4.2 percent. With the third estimate for the second quarter, the general picture of economic growth remains the same; increases in nonresidential fixed investment and in exports were larger than previously estimated.
The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, nonresidential fixed investment, state and local government spending, and residential fixed investment. 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 compounded annual rate of change of the implicit price deflator at 2.1% to 2.2% (consensus 2.1%) versus the reported 2.1%. The following compares the GDP implicit price deflator year-over-year growth to the Consumer Price Index [this puts both on the same basis for comparision]:
What the BLS says about the revision from the second to the third estimate:
The upward revision to the percent change in real GDP primarily reflected upward revisions to nonresidential fixed investment and to exports.
In the same release, corporate profits data was released showing expansion in 2Q2014. There was an upward revision of profits from $154.9 (second estimate) to $164.1 billion (third estimate):
Profits from current production (corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)) increased $164.1 billion in the second quarter, in contrast to a decrease of $201.7 billion in the first.
Profits of domestic financial corporations increased $33.3 billion in the second quarter, in contrast to a decrease of $86.2 billion in the first. Profits of domestic nonfinancial corporations increased $134.3 billion, in contrast to a decrease of $89.6 billion. The rest-of-the-world component of profits decreased $3.6 billion in the second quarter, compared with a decrease of $26.0 billion in the first. This measure is calculated as the difference between receipts from the rest of the world and payments to the rest of the world. In the second quarter, receipts increased $2.7 billion and payments increased $6.3 billion.
Taxes on corporate income increased $45.7 billion in the second quarter, compared with an increase of $66.9 billion in the first. Profits after tax with IVA and CCAdj increased $118.4 billion, in contrast to a decrease of $268.6 billion. Dividends decreased $0.5 billion in the second quarter, compared with a decrease of $89.5 billion in the first. Undistributed profits increased $118.8 billion, in contrast to a decrease of $178.9 billion. Net cash flow with IVA — the internal funds available to corporations for investment — increased $133.4 billion, in contrast to a decrease of $163.0 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. 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 Q2 GDP Third Estimate of 4.6 percent matched the forecast of most mainstream economists and reinforces the opinion that the Q1 GDP contraction was a weather-related fluke.
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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