Third Estimate 4Q2018 GDP Lowered to 2.2%. Corporate Profits Down.

Written by Steven Hansen

The third estimate of fourth-quarter 2018 Real Gross Domestic Product (GDP) was 2.2 % (down from 2.6 %).

The market expected (from Econoday):

• Headline GDP is calculated by annualizing one quarter’s data against the previous quarter’s 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 3.0 % – up from 3Q2018’s 3.0 % year-over-year. So one might say that the rate of GDP growth was unchanged from the previous quarter.

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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

This third estimate released today is based on more complete source data. (See caveats below.)

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 1.7 % to GDP.
• trade balance improved deducting 0.1 % from GDP
• inventory change added 0.1 % to GDP
• fixed investment added 0.5 % to GDP
• federal spending deducting 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 the third estimate of GDP:

Real gross domestic product (GDP) increased at an annual rate of 2.2 percent in the fourth quarter of 2018 (table 1), according to the “third” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.4 percent.

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 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.

The fourth-quarter change in real GDP was revised down 0.4 percentage point, reflecting downward revisions to PCE, state and local govermment spending, and nonresidential fixed investment that were partly offset by a downward revision to imports.

In the same release, corporate profits data was released showing improving growth.

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) decreased $9.7 billion in the fourth quarter, in contrast to an increase of $78.2 billion in the third quarter. Profits of domestic financial corporations decreased $25.2 billion in the fourth quarter, compared with a decrease of $6.1 billion in the third quarter. Profits of domestic nonfinancial corporations increased $13.6 billion, compared with an increase of $83.0 billion. Rest-of-the-world profits increased $1.9 billion, compared with an increase of $1.3 billion. In the fourth quarter, receipts increased $8.8 billion, and payments increased $6.9 billion.

Caveats on the Use of Gross Domestic Product (GDP)

GDP is a 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 home costs (other than the new home purchase price even though mortgaged up to 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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