Written by Jill Mislinski and Steven Hansen

The advance estimate of first quarter 2017 Real Gross Domestic Product (GDP) is a positive 0.7 %. This growth is less good than the previous quarter's 2.1 % if one looks at quarter-over-quarter headline growth. Year-over-year growth improved modestly so one could say economic growth was better.

Analyst Opinion of GDP

The consumer spending decline, the trade balance improved - and GDP lost almost 1% due to the gaming of inventory hocus-pocus. I am not a fan of quarter-over-quarter exaggerated method of measuring GDP - but my year-over-year preferred method showed only moderate deceleration from last quarter. First quarter GDP seems plagued with seasonal adjustment issues - as low numbers occur often since the end of the Great Recession.

The market expected (from Bloomberg / Econoday):

Consider:

• This advance estimate released today is based on source data that are incomplete or subject to further revision. (See caveats below.) Please note that historically advance estimates have turned out to be little more than wild guesses.
• 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 1Q2017, the year-over-year growth is 1.9 % - down from 4Q2016's 2.0 % year-over-year growth. So one might say that the rate of GDP growth decelerated +0.1 % 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

Real GDP is inflation adjusted and annualized - and Real GDP per capita remains on a general upward trend.

Real GDP per Capita

The table below compares the previous quarter estimate of GDP (Table 1.1.2) with the advance estimate this quarter which shows:

• consumption for goods and services decelerated.
• trade balance improved and increased GDP by 0.7% (imports grew and exports declined)
• inventory change removed 0.9 % to GDP
• except for inventory growth, fixed investment growth improved
• there was marginal decline in federal spending

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

What the BEA says about this advance estimate:

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

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 deflator to the Consumer Price Index:

Overview Analysis:

Here is a look at Quarterly GDP since Q2 1947. Prior to 1947, GDP was an annual calculation. To be more precise, the chart shows is the annualized percentage change from the preceding quarter in Real (inflation-adjusted) Gross Domestic Product. We've also included recessions, which are determined by the National Bureau of Economic Research (NBER). Also illustrated are the 3.22% average (arithmetic mean) and the 10-year moving average, currently at 1.39%.

Here is a log-scale chart of real GDP with an exponential regression, which helps us understand growth cycles since the 1947 inception of quarterly GDP. The latest number puts us 15.1% below trend, the largest negative spread in the history of this series.

A particularly telling representation of slowing growth in the US economy is the year-over-year rate of change. The average rate at the start of recessions is 3.35%. Nine of the eleven recessions over this timeframe have begun at a higher level of real YoY GDP.

In summary, the Q1 GDP Advance Estimate of 0.7% disappointed forecasts and well below the 2.1% GDP for the previous quarter.

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.