Second Estimate 2Q2018 GDP Growth Improves to 4.2 %

The headline second estimate of second quarter 2018 Real Gross Domestic Product (GDP) marginally improved to a positive 4.2 % from the advance estimate's 4.1 %. Year-over-year growth was modestly revised upward from the advance estimate.

Analyst Opinion of GDP

There was minor change between the advance and this second GDP estimate. The biggest change was an improvement in fixed investment - everything else seemed to have minor tweaks. I am not a fan of a quarter-over-quarter exaggerated method of measuring GDP - but my year-over-year preferred method showed good acceleration from last quarter.

The market expected (from Nasdaq / Econoday):

• Headline GDP is calculated by annualizing one quarter's data against the previous quarters data. A better method would be to look at growth compared to the same quarter one year ago. For 2Q2018, the year-over-year growth is now 2.9 % - up from 1Q2018's 2.6 % year-over-year and the advance estimates 2.8 % growth. So one might say that the rate of GDP growth improved 0.3 % 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 second estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. (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 improved adding 2.6% to GDP.
• trade balance improved adding 1.1 % to GDP
• inventory change removed 1.0 % from GDP
• fixed investment growth added 1.1 % to GDP
• federal spending added 0.4 % to GDP

The following is Table 1.1.2 before the annual revision: [click to enlarge]

 

z gdp_table.png

What the BEA says about the second estimate of GDP:

In the advance estimate, the increase in real GDP was 4.1 percent. With this second estimate for the second quarter, the general picture of economic growth remains the same; the revision primarily reflected upward revisions to nonresidential fixed investment and private inventory investment that were partly offset by a downward revision to personal consumption expenditures (PCE). Imports which are a subtraction in the calculation of GDP, were revised down. (s

The following compares the GDP deflator to the Consumer Price Index:

BLS explanation of the changes to GDP:

The percent change in real GDP was revised up 0.1 percentage point from the advance estimate, reflecting upward revisions to nonresidential fixed investment, private inventory investment, federal government spending, and state and local government spending that were partly offset by downward revisions to PCE, residential fixed investment, and exports. Imports were revised down. For more information, see the Technical Note. A detailed "Key Source Data and Assumptions" file is also posted for each release. For information on updates to GDP, see the "Additional Information" section that follows.

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 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, 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.