Third Estimate 1Q2021 GDP Unchanged At 6.4%. Corporate Profits Improve.

Written by Steven Hansen

The third estimate of fourth-quarter 2020 Real Gross Domestic Product (GDP) was unchanged at 6.4 %.

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 1Q2021, the year-over-year growth is now +0.5 % – up from 4Q2020’s -1.9 % year-over-year. So one might say that the rate of GDP growth accelerated by 2.4 % 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 improved and added 7.4 % to GDP.
• trade balance improved but still removed 1.2 % from GDP
• inventories declined and removed 2.8 % from GDP
• fixed investment growth slowed but added 2.0 % to GDP
• government spending growth improved and added 0.9 % to 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 in the first quarter reflected increases in personal consumption expenditures (PCE), nonresidential fixed investment, federal government spending, residential fixed investment, and state and local government spending that were partly offset by decreases in private inventory investment and exports. Imports increased (table 2).

The increase in PCE reflected increases in durable goods (led by motor vehicles and parts), nondurable goods (led by food and beverages), and services (led by food services and accommodations). The increase in nonresidential fixed investment reflected increases in equipment (led by information processing equipment) and intellectual property products (led by software). The increase in federal government spending primarily reflected an increase in payments made to banks for processing and administering the Paycheck Protection Program loan applications as well as purchases of COVID-19 vaccines for distribution to the public. The decrease in private inventory investment primarily reflected a decrease in retail trade inventories(mainly by motor vehicles and parts dealers).

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 first-quarter real GDP was the same as in the second estimate. Upward revisions to nonresidential fixed investment, private inventory investment, exports, and PCE were offset by an upward revision to imports.

Corporate Profits

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $55.2billion in the first quarter, in contrast to a decrease of $31.4 billion in the fourth quarter

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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