Written by Steven Hansen
The advance estimate for third-quarter 2020 Real Gross Domestic Product (GDP) is a positive 31.4%. This growth is a significant improvement from the previous quarter’s decline of 31.4 % if one looks at quarter-over-quarter headline growth. The year-over-year rate of growth also significantly improved but remains in contraction.
Analyst Opinion of GDP
The coronavirus recovery is the reason for the improvement – and pushed GDP quarter-over-quarter growth to record levels.
I am not a fan of quarter-over-quarter exaggerated method of measuring GDP – but the recovery from the pandemic is not over as the year-over-year GDP growth remains in contraction.
The market expected (from Econoday):
| Seasonally Adjusted Quarter-over-Quarter Change at an annual rate | Consensus Range | Consensus | Advance Actual | Second Actual | Third Actual |
| Real GDP – Q/Q change – SAAR | 30.3 % to 39.2 % | +38.9 % | +33.1 % | ||
| Real Consumer Spending – Q/Q change – SAAR | 30.3 % to 39.2 % | +38.9 % | +40.7 % |
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 3Q2020, the year-over-year growth is now -2.9 % – up from 2Q2020’s -9.0 % year-over-year. So one might say that the rate of GDP growth accelerated by 6.1 % 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 was on a general upward trend until the pandemic cause recession hit.
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 and added 25.3 % to GDP.
- trade balance declined and removed 3.1 % from GDP
- inventories grew and added 6.6 % to GDP
- fixed investment improved and added 5.0 % to GDP
- government spending decline and removed 0.7 % from GDP
The following is Table 1.1.2: [click to enlarge]
z gdp_table.png
What the BEA says about this advance estimate:
The increase in real GDP reflected increases in personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, and residential fixed investment that were partly offset by decreases in federal government spending (reflecting fewer fees paid to administer the Paycheck Protection Program loans) and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased (table 2). The increase in PCE reflected increases in services (led by health care as well as food services and accommodations) and goods (led by motor vehicles and parts as well as clothing and footwear). The increase in private inventory investment primarily reflected an increase in retail trade (led by motor vehicle dealers). The increase in exports primarily reflected an increase in goods (led by automotive vehicles, engines, and parts as well as capital goods). The increase in nonresidential fixed investment primarily reflected an increase in equipment (led by transportation equipment). The increase in residential fixed investment primarily reflected an increase in brokers’ commissions and other ownership transfer costs.
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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