Second Estimate 4Q2011 GDP: Upward Revision to 3.0%

Written by Steven Hansen and Doug Short

The second estimate of fourth quarter 2011 Real Gross Domestic Product (GDP) is 3.0%

  • 3Q2011 GDP was 1.8%
  • The advance estimate of 4Q2011 GDP was 2.8%
  • The market expected 4Q2011 GDP at 2.8%.
  • Annual GDP growth for 2011 is 1.7% (calendar year 2011 over calendar year 2010)

For the most part, this second estimate offers few surprises, with slight adjustments to all numbers – which would be expected with more complete data.  If one would try to isolate the dynamics of what caused the improvement from 2.8% (advance) to 3.0%, it appears the bad was less bad (led by non-residential structures) – and the improvement in consumer spending for services was much better than the advance.

This second estimate of GDP is based on more complete source data than was available for the “advance” estimate. (See caveats below.)

Real GDP is inflation adjusted and annualized – the economy only grew moderately per capita, and per capita GDP is roughly slightly more than half recovered from the trough of the great recession.

The table below compares the composition of the prior releases of GDP with the advance and second estimates 4Q2011 GDP which shows:

  • the major headwinds to GDP remains the government (-0.89%) and imports (-0.65%) – but these headwinds have lessened in the second estimate.
  • the major driver in GDP remains inventory restocking contributing 1.88% of the 3.0% – however this is slightly less good in the second estimate.  Inventory growth contribution must be taken as a two-edged sword, as it means part of future economic growth was taken in 4Q2011 (GDP for goods is determined at point of manufacture, not point of sale).
  • consumers were moderately active in 4Q2011 – contributing roughly half of the growth – with a slight improvement over the first estimate.  This is less than the historical 2/3 of GDP coming from consumers.  If consumption had made its historic contribution real GDP growth would have come in at 3.5%.

What the BEA says about 4Q2011 GDP:

The increase in real GDP in the fourth quarter reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), exports, nonresidential fixed investment, and residential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP in the fourth quarter primarily reflected an upturn in private inventory investment and accelerations in PCE and in residential fixed investment that were partly offset by a deceleration in nonresidential fixed investment, a downturn in federal government spending, an acceleration in imports, and a larger decrease in state and local government spending.

Final sales of computers added 0.12 percentage point to the fourth-quarter change in real GDP after adding 0.22 percentage point to the third-quarter change. Motor vehicle output added 0.43 percentage point to the fourth-quarter change in real GDP after adding 0.12 percentage point to the third-quarter change.

What the BLS says about the revision from the advance to second estimate:

The “second” estimate of the fourth-quarter increase in real GDP is 0.2 percentage point, or $7.5 billion, higher than the advance estimate issued last month. The upward revision to the percent change in real GDP primarily reflected an upward revision to nonresidential fixed investment, a downward revision to imports, and an upward revision to personal consumption expenditures (PCE).

Although on the surface 3.0% GDP growth is good – the reason for caution is that the 4Q2011 growth will likely not carry on into 1Q2012. Inventory growth cannot drive economic growth.  The economy is still searching for a driver in 2012.  There is still room for the consumer to fill part of that need.

Overview Analysis:

Here is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. To be more precise, what the lower half of the chart shows is the percent change from the preceding period in Real (inflation-adjusted) Gross Domestic Product. We’ve also included recessions, which are determined by the National Bureau of Economic Research (NBER).

Here is a close-up of GDP alone with a line to illustrate the 3.3 average (arithmetic mean) for the quarterly series since the 1947. We’ve also plotted the 10-year moving average, currently at 1.7. The Second Estimate for Q4 GDP puts us closer to the mean.

Here is the same chart with a linear regression that illustrates the gradual decline in GDP over this time frame. The latest GDP number is above the approximate 2.1 of the regression at the same position on the horizontal axis.

And for a bit of political trivia in this pre-election  period, here is a look at GDP overlaid with party in control of the White House and Congress.

In summary, the Q4 GDP Second Estimate of 3.0 came in above expectations. With tomorrow’s release of the BEA’s Personal Income and Outlays report for January, we will have a more detailed look at the November and December revisions to the critical component of GDP — personal consumption expenditures.

Caveats on the Use of Gross Domestic Product (GDP)

GDP is 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 include home costs (other than the new home purchase price even though mortgaged up 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 in 1970, and Joe Sixpack’s kid in 2011, 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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