Third Estimate 4Q2013 GDP Revised to 2.6%

Written by Doug Short and Steven Hansen

The third estimate of fourth quarter 2013 Real Gross Domestic Product (GDP) is now a positive 2.6%.

• The market expected GDP at +2.2% to 3.0% (consensus 2.7%).
• This data point was 3.2% in the advance GDP estimate, and 2.4% 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 higher consumer spending on services.

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 expanding in cumulative and on a per capita basis.

Real GDP per Capita

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

• consumption for services has improved;
• trade balance improved;
• there was an inventory decline;
• government has a 1% drag on GDP.

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 4Q2013 GDP:

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

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 1.5% to 1.6% (consensus 1.6%) versus the reported 1.6%. 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 upward revision to the percent change in real GDP primarily reflected an upward revision to personal consumption expenditures that was partly offset by downward revisions to nonresidential fixed investment and to private inventory investment.

In the same release, corporate profits data was released showing expansion in 4Q2013 :

Profits from current production (corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)) increased $47.1 billion in the fourth quarter, compared with an increase of $39.2 billion in the third. Taxes on corporate income increased $13.3 billion, in contrast to a decrease of $0.4 billion. Profits after tax with IVA and CCAdj increased $33.8 billion, compared with an increase of $39.5 billion.

Dividends increased $90.5 billion in the fourth quarter, in contrast to a decrease of $179.0 billion in the third. Undistributed profits decreased $56.7 billion, in contrast to an increase of $218.6 billion. Net cash flow with IVA — the internal funds available to corporations for investment — decreased $43.0 billion, in contrast to an increase of $231.1 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 1.7. The current GDP is now just above 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 2.59 percent is off its interim low of 1.32 percent in Q1 of last year.

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 Third Estimate of 2.6 percent was in the general ballbark for most forecasts. But the third estimate for the preceding quarter is by definition a refined look at the rear view mirror. More interesting will be next month’s first look at Q1 of this year.

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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