Second Estimate: First Quarter 2011 GDP Unchanged

by Doug Short and Steven Hansen

Gross Domestic Product (GDP) is an economists’ view of what they consider to be the productive elements of society.

Essentials to Main Street are not necessary included such as buying an existing home, or used car, or even jobs.  GDP measures expenditures on newly produced goods and services.  Money invested or saved is not included.

Main Street may be better off today with the unchanged and very low 1.8% second estimate of 1Q2011 GDP than the 5.0% in 4Q2009.  In many ways, GDP more aligns as a Wall Street metric.

Pundits were looking for 1Q2011 GDP to rise over 2%.  What happened is simply explained by the Bureau of Economic Analysis (BEA):

The “second” estimate of the first-quarter increase in real GDP is the same as the advance estimate. Upward revisions to exports, to private inventory investment, and to nonresidential fixed investment were offset by an upward revision to imports and a downward revision to personal consumption expenditures.

What 1Q2011 second estimate is saying is that the consumer is spending less on new things than was first estimated.

Here’s 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. Recessions are also included, as determined by the National Bureau of Economic Research (NBER).

Here 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, which, at 1.8, is the same as today’s GDP number.

Here is the same chart with a linear regression that illustrates the gradual decline in GDP over this timeframe. The latest GDP number is about 0.4 below the approximate 2.2 of the regression at the same position on the horizontal axis.

And for a bit of political trivia in this post-election period, here’s a look a GDP by party in control of the White House and Congress.

In summary, the Q1 GDP second estimate of 1.8 was little more than half the long-term 3.3 GDP average, below the regression and spot on the 10-year moving average. The first quarter of 2011 doesn’t offer evidence of a strong recovery from the Financial Crisis and Great Recession.

Looking forward to 2Q2011, is this a bellwether?  In many ways “yes” if we look at the trends.

  • Headwinds from government spending will accelerate throughout this year;
  • The global economy is cooling off and long range indicators are indicating a much slower rate of growth.  This reduces exports (a positive element of GDP);
  • High oil prices increase imports (a negative to GDP), and squeeze out consumer spending on non-fuel items;

The question remains whether the other elements of GDP will grow faster than the headwinds are growing.  Recent data says no.

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