4Q2011 GDP Unchanged, Has Headwinds Going Forward

Written by Steven Hansen and Doug Short

The third 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 second estimate of 4Q2011 GDP was 3.0%
  • The market expected 3rd estimate 4Q2011 GDP at 3.0%.
  • Annual GDP growth for 2011 is 1.7% (calendar year 2011 over calendar year 2010)

For the most part, this third estimate offered no surprises, with slight adjustments to all numbers – which would be expected with more complete data.  Overall, looking at the trends between the 4Q2011 estimates as a forecasting tool for 1Q2012 GDP – there are negative connotations.

  • Exports continued to weaken meaning that the trade balance will reduce GDP going forward.
  • Investment is continuing to strengthen but the inventory boost likely will disappear making the investment number lower.
  • State and local governments seem to be spending more making the debt reduction headwinds less severe.

This third estimate of GDP is based on more complete source data than was available for the “advance”  or second estimates. (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, second estimates and third 4Q2011 GDP which shows:

  • the major headwinds to GDP remains the government (-0.84%) and weakening exports which have worsened the trade balance.
  • the major driver in GDP remains inventory restocking contributing 1.81% of the 3.0% – however this is slightly less good then the previous 4Q2011 GDP estimates. 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. 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 primarily reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), nonresidential fixed investment, exports, 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 deceleration in exports.

Motor vehicle output added 0.47 percentage point to the fourth-quarter change in real GDP after adding 0.12 percentage point to the third-quarter change.  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.

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

The “third” estimate of the fourth-quarter percent change in real GDP is the same as the “second” estimate issued last month, primarily reflecting a downward revision to exports that was offset by an upward revision to nonresidential fixed investment.

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. I’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. I’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 timeframe. 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 post-election period, here is a look a GDP by 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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