Third Estimate 1Q2018 GDP Decreased to 2.0%. Corporate Profits Up.

Written by Steven Hansen

The third estimate of first quarter 2018 Real Gross Domestic Product (GDP) was revised down to 2.0 % from the second estimate’s 2.2 %..

The market expected (from Nasdaq / Econoday):

• Headline GDP is calculated by annualizing one quarter’s data against the previous quarters data. A better method would be to look at growth compared to the same quarter one year ago. For 1Q2018, the year-over-year growth is now 2.8 % (down from the advance estimates 2.9 %) – up from 4Q2017’s 2.6 % year-over-year growth. So one might say that the rate of GDP growth improved 0.2 % from the previous quarter.

Real GDP Expressed As Year-over-Year Change

The same report also provides Gross Domestic Income 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

The GDP estimate released today is based on more complete source data than were available for the “second” estimate issued last month.

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 slowed and only adding 0.6% to GDP.
• trade balance improved and did not affect GDP
• inventory change did not affect GDP
• fixed investment growth added 1.2 % to GDP
• federal spending added 0.1 % to GDP

The following is Table 1.1.2: [click to enlarge]

What the BEA says about the third estimate of GDP:

In the second estimate, the increase in real GDP was 2.2 percent. With this third estimate for the first quarter, the general picture of economic growth remains the same; private inventory investment and personal consumption expenditures (PCE) were revised down

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 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 percent change in real GDP was revised down 0.2 percentage point from the second estimate, reflecting downward revisions to private inventory investment, PCE, and exports that were partly offset by an upward revision to nonresidential fixed investment. Imports were revised up.

n the same release, corporate profits data was released showing less growth.

Profits from current production (corporate profits with inventory valuation adjustment and capital consumption adjustment) increased $39.5 billion in the first quarter, in contrast to a decrease of $1.1 billion in the fourth quarter.

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, 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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