Written by Steven Hansen
The advance [and second] estimate of fourth quarter 2018 Real Gross Domestic Product (GDP) is a positive 2.6 %. This growth is worse than the previous quarter’s 3.4 % if one looks at quarter-over-quarter headline growth.Year-over-year growth improved modestly so one could also say economic growth was better.
Analyst Opinion of GDP
Over 2 % of this 3.5% growth number is attributable to inventory growth (materials manufactured but not yet sold). I consider this a very weak report.
I am not a fan of quarter-over-quarter exaggerated method of measuring GDP – but my year-over-year preferred method showed moderate acceleration from last quarter.
The market expected (from Econoday):
| Seasonally Adjusted Quarter-over-Quarter Change at annual rate | Consensus Range | Consensus | Advance Actual | Second Actual | Third Actual |
| Real GDP | 1.8 % to 2.8 % | 2.4 % | +2.6 % | ||
| GDP price index | 1.3 % to 2.3 % | 1.6 % | +1.8 % | ||
| Real Consumer Spending – Q/Q change | +2.8 % |
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. HOWEVER – because of the government shutdown – this is also considered the second release of 4Q2018 GDP.
- 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 4Q2018, the year-over-year growth is now 3.1 % – up from 3Q2018’s 3.0 % year-over-year. So one might say that the rate of GDP growth improved 0.1 % 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 remains on a general upward trend.
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 improved adding 1.9 % to GDP.
- trade balance improved deducting 0.2 % from GDP
- inventory change added 0.1 % to GDP
- fixed investment added 0.8 % to GDP
- federal spending added 0.1 % to GDP
The following is Table 1.1.2 before the annual revision: [click to enlarge]
z gdp_table.png
What the BEA says about this advance estimate:
Due to the recent partial government shutdown, this initial report for the fourth quarter and annual GDP for 2018 replaces the release of the “advance” estimate originally scheduled for January 30th and the “second” estimate originally scheduled for February 28th.
The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, exports, private inventory investment, and federal government spending. Those were partly offset by negative contributions from residential fixed investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.
The deceleration in real GDP growth in the fourth quarter reflected decelerations in private inventory investment, PCE, and federal government spending and a downturn in state and local government spending. These movements were partly offset by an upturn in exports and an acceleration in nonresidential fixed investment. Imports increased less in the fourth quarter than in the third quarter.
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 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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