Written by Steven Hansen
The advance estimate of fourth quarter 2018 Real Gross Domestic Product (GDP) is a positive 3.2 %. This growth is better than the previous quarter’s 2.2 % if one looks at quarter-over-quarter headline growth.Year-over-year growth also improved modestly so one could also say economic growth was better.
Analyst Opinion of GDP
0.7 % of this 3.2 % growth number is attributable to inventory growth (materials manufactured but not yet sold). Consumer spending was weak. The strength in this report is the trade balance not being a drag on GDP.
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 an annual rate | Consensus Range | Consensus | Advance Actual | Second Actual | Third Actual |
| GDP core price index – Q/Q change – SAAR | 1.3 % to 2.2 % | 1.6 % | +1.3 % | ||
| Real GDP – Q/Q change – SAAR | 1.4 % to 2.8 % | 2.3 % | +3.2 % | ||
| GDP price index – Q/Q change – SAAR | 1.2 % to 2.8 % | 1.7 % | +0.9 % | ||
| Real Consumer Spending – Q/Q change – SAAR | 0.3 % to 2.6 % | 1.1 % | +1.2 % |
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.
- 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 1Q2019, the year-over-year growth is now 3.2 % – up from 4Q2018’s downwardly revised 3.0 % year-over-year. So one might say that the rate of GDP growth improved by 0.2 % 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 0.8 % to GDP.
- trade balance improved adding 1.0 % to GDP
- inventory change added 0.7 % to GDP
- fixed investment added 0.3 % to GDP
- government spending added 0.4 % 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:
The increase in real GDP in the first quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, state and local government spending, and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased (table 2). These contributions were partly offset by a decrease in residential investment.
The acceleration in real GDP growth in the first quarter reflected an upturn in state and local government spending, accelerations in private inventory investment and in exports, and a smaller decrease in residential investment. These movements were partly offset by decelerations in PCE and nonresidential fixed investment, and a downturn in federal government spending. Imports, which are a subtraction in the calculation of GDP, turned 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 deflator to the Consumer Price Index:
Caveats on the Use of Gross Domestic Product (GDP)
GDP is the 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 the 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 did 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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