Third Estimate 4Q2020 GDP Improves Marginally to 4.3%. Corporate Profits Improve.

Written by Steven Hansen

The third estimate of fourth-quarter 2020 Real Gross Domestic Product (GDP) improved from the second estimate’s positive 4.1 % to 4.3 %.

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 4Q2020, the year-over-year growth is now -2.4 % – up from 3Q2020’s -2.8 % year-over-year. So one might say that the rate of GDP growth accelerated by 0.4 % 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

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 growth slowed but added 1.6 % to GDP.
• trade balance improved but still removed 1.5 % from GDP
• inventories grew at a slower rate but added 1.4 % to GDP
• fixed investment growth slowed but added 3.0 % to GDP
• government spending growth improved but still removed 0.1 % from GDP

The following is Table 1.1.2: [click to enlarge]

z gdp_table.png

What the BEA says about the third estimate of GDP:

The increase in real GDP reflected increases in exports, nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, and private inventory investment, that were partly offset by decreases in state and local government spending as well as federal government spending (reflecting fewer fees paid to administer the Paycheck Protection Program loans). Imports, which are a subtraction in the calculation of GDP, increased

The increase in exports primarily reflected an increase in goods (led by industrial supplies and materials). The increase in nonresidential fixed investment primarily reflected an increase in equipment (led by transportation equipment). The increase in PCE reflected an increase in services (led by health care). The increase in residential fixed investment primarily reflected an increase in single family units. The increase in private inventory investment primarily reflected an increase in manufacturing, including both durable and nondurable goods industries.

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:

In the third estimate, the change in fourth-quarter real GDP was revised up 0.2 percentage point from the second estimate. The updated estimates primarily reflected upward revisions to private inventory investment and state and local government spending that were partly offset by downward revisions to nonresidential fixed investment and consumer spending.

Corporate Profits

Real gross output—principally a measure of an industry’s sales or receipts, which includes sales to final users in the economy (GDP) and sales to other industries (intermediate inputs)—increased 6.7 percent in the fourth quarter. Private goods-producing industries increased 7.2 percent, private services-producing industries increased 7.8 percent, and government was unchanged (table 16). Overall, 17 of 22 industry groups contributed to the increase in real gross output, led by durable goods manufacturing; professional, scientific, and technical services; and health care and social assistance. Industries with notable decreases in gross output included educational services, utilities, and accommodation and food services.

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 the 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 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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