2nd Quarter GDP Up 4.1% Despite Largest Inventory Contraction Since 2009

The Advance Estimate of 2nd Quarter GDP from the Bureau of Economic Analysis released on Friday included changes in definitions, in classifications, and in the presentation of the components of GDP, as well as an annual and a comprehensive (or benchmark) revision of the national income and product accounts going back to 1929, ie, from the beginning of that measure of our economic history. Also with this benchmark revision, the reference year for the chain-type quantity and price indexes and for chained-dollar estimates of the GDP components has been updated to 2012 from 2009, which means that the quantity of goods and services produced in the US will now be represented by chained 2012 dollars, at least until the next benchmark revision, which is expected to be five years hence. Despite the extensive revision of GDP data over time, the annual growth rate for the recent years was not much different than in previously published estimates. In addition to reporting on the recent quarters of 2018, this report also showed that the GDP growth rate for 2012 was unrevised at 2.2%, that the GDP growth rate for 2013 was revised from 1.7% to 1.8%, that the GDP growth rate for 2014 was revised from 2.6% to 2.5%; that the GDP growth rate for 2015 was unrevised at 2.9%, that the GDP growth rate for 2016 was revised from 1.5% to 1.6%, and that the GDP growth rate for 2017 was revised from 2.3% to 2.2%. As a result of those revisions, the average annual growth rate of real GDP over the entire period from 2012–2017 was 2.2 percent, the same as it was in the previously published estimates.

The first quarter of 2018, which had been revised down to a growth rate of 2.0% when we reviewed it a month ago, has now been revised back up to show growth at a 2.2% rate. Major first quarter components that were revised higher included nonresidential fixed investment, which was revised from growth at a 7.6% rate to growth at a 8.0% rate, and growth in real private inventory investment, which was revised from growth at an inflation adjusted $13.9 billion rate to growth at $30.3 billion rate. Those major positive revisions were partially offset by an downward revision to personal consumption expenditures (PCE), from a 0.9% growth rate to growth at a 0.5% rate, and a deeper contraction of real residential fixed investment, which was revised from shrinking at a 1.1% rate to shrinking at a 3.4% rate. First quarter growth of exports remained unchanged at 3.6%, growth of imports was revised from a 3.2% rate to 3.0%, and the growth of state and local government spending and investment remained at at a 1.5% rate. Thus the estimates for the 1st quarter of 2018 GDP have gone from the initial estimate of growth at a 2.3% rate, to an 2.2% growth rate in the 2nd estimate, to a 2.0% rate of growth in the 3rd estimate, and finally back to growth at a 2.2% rate in this annual revision.

For the quarter just ended, the Advance Estimate of 2nd Quarter GDP indicated that the real output of goods and services produced in the US grew at a 4.1% annual rate over the output of the 1st quarter of this year, which we have just seen was revised to show growth at a 2.2% rate. Contributing to the 2nd quarter advance were greater growth of personal consumption expenditures, nonresidential fixed investment, and government spending, which were partly offset by a contraction of private inventories. In current dollars, our second quarter GDP grew at a 7.41% annual rate, increasing from what would work out to be a $20,041.0 billion a year rate in the 1st quarter to a $20,402.5 billion annual rate in the 2nd quarter, with the headline 4.1% annualized rate of increase in real output arrived at after an annualized GDP inflation adjustment averaging 3.0% was computed and applied to the current dollar change. Note that the BEA cautions that the source data is incomplete and also subject to revisions, which have now averaged +/-0.6% in either direction from the advance to the third estimate, and +/- 1.3% from the advance estimate to the latest reading. Also note that June construction and some inventory data have yet to be reported, and that information on the assumptions used for those reports and unavailable source data for this advance estimate is provided in a technical note that is posted with the news release, and an Excel file with key source data and assumptions.. We will update those assumptions when the actual data becomes available.

While we cover the details on the 2nd quarter below, remember that the GDP release reports all quarter over quarter percentage changes at an annual rate, which means that they’re expressed as a change a bit over 4 times of that what actually occurred over the 3 month period, and that the prefix “real” is used to indicate that each change has been adjusted for inflation using price changes now chained from 2012, and then that all percentage changes in this report are calculated from those 2012 dollar figures, which would be better thought of as a quantity indexes than as any reality based dollar amounts. For our purposes, all the data that we’ll use in reporting the changes here comes directly from the pdf for the 1st estimate of 2nd quarter GDP, which is linked to on the sidebar of the BEA press release, which also links to just the tables on Excel and other technical notes. Specifically, we refer to table 1, which shows the real percentage change in each of the GDP components annually since 2007 and quarterly since 2012, table 2, which shows the contribution of each of the components to the GDP figures for those quarters and years, table 3a, which shows the current dollar value of each of the GDP components, table 3b, which shows the inflation adjusted value in 2012 dollars of each of those components, and table 4, which shows the change in the price indexes for each of the GDP components….other intervening tables in this release, such as table 1a, give us the previously published data for each of the corresponding metrics going back to 2007, should anyone be interested in more details on this benchmark revision..

Personal consumption expenditures (PCE), which accounts for more than 69% of GDP, grew at a 5.9% rate in current dollars in the 2nd quarter, which worked out to a 4.0% real growth rate of consumed goods and services after an annualized 1.8% PCE price index increase was used to adjust that personal spending for inflation. Consumer spending for durable goods rose at a 7.8% rate, on higher spending for automobiles, furniture and recreational goods and vehicles, but since weighted prices for those durable goods fell at a 1.4% rate, the real output of durable goods represented by that spending increased at a 9.3% rate. Over the same period, consumer spending for non durables rose at a 5.7% rate, but since the PCE price index for non-durables increased at a 1.4% rate, that meant real growth in consumption of non durables was up at a 4.2% rate. Meanwhile, the 5.7% current dollar growth in personal spending for services was reduced by a +2.5% inflation adjustment to show real 2nd quarter growth in consumer services was at a 3.1% rate. Thus, with real growth in all components of personal consumption expenditures, real growth in output of consumer durable goods added 0.64 percentage points to the change in 2nd quarter GDP, real growth in non-durable goods output for consumers added 0.59 percentage points to 2nd quarter GDP growth, and real growth in services provided to consumers added 1.46 percentage points to the change in 2nd quarter GDP…

Just as personal consumption expenditures are adjusted for inflation using the PCE price indices to arrive at real PCE, all the other current dollar components of GDP are also adjusted for inflation with the price indexes shown in table 4 of the GDP pdf to yield the real change in the output of goods or services. Hence, real gross private domestic investment, which had grown at a 9.6% annual rate in the 1st quarter as both fixed investment and inventory investment rose, fell at a 0.5% annual rate in the 2nd quarter, as investment in inventories fell. However, real non residential fixed investment still rose at a 7.3% annual rate, as real investment in non-residential structures rose at a 13.3% rate, real investment in equipment rose at a 3.9% rate, and investment in intellectual property grew at 8.2% rate. As a result, investment in real non residential fixed investment added 0.98 percentage points to the change in 2nd quarter GDP as real investment in non-residential structures added 0.39 percentage points to the change in GDP, real investment in equipment added 0.23 percentage points, and investment in intellectual property added 0.35 percentage points to the change in GDP. However, residential investment fell at a 1.1% rate and hence subtracted 0.04 percentage points from the 2nd quarter’s GDP, which reduced the total fixed investment contribution to GDP to 0.94 percentage points. For an easy to read table as to what’s included in each of those investment categories, see the NIPA Handbook, Chapter 6, page 3.

Meanwhile, in the first real drop since the 1st quarter of 2017, investment in real private inventories fell by an inflation adjusted $27.9 billion in the 2nd quarter, the largest drop since the 4th quarter of 2009, after they had grown by an adjusted $30.3 billion in the 1st quarter, and as a result the $58.2 billion downward swing in inventory growth subtracted 1.00 percentage points from the 2nd quarter’s growth rate, after an inflation adjusted $14.2 billion increase in inventory growth in the 1st quarter had added 0.27 percentage points to that quarter’s GDP growth rate. However, smaller inventories indicate that less of the goods produced during the quarter were being left “sitting on the shelf”, so their quarter over quarter decrease by $58.2 billion meant that real final sales of GDP were relatively greater by that much, or enough to boost 2nd quarter growth in real final sales of GDP to a 5.1% rate. That’s compared to the real final sales growth at a 1.9% rate in 1st quarter, when the increase in inventory growth meant that part of the increase in GDP had not been sold…

After adjustment for 5.8% growth in export prices and 0.1% growth in import prices, both real exports and real imports increased in the 2nd quarter, as our real exports of goods and services rose at a 9.3% rate in the second quarter, after rising at a 3.6% rate in the 1st quarter, while our real imports rose at a 0.5% rate in the 2nd quarter after rising at a 3.0% rate in the 1st quarter. As you’ll recall, increases in exports are added to GDP because they are part of our production that was not consumed or added to investment in our country (& hence not counted in GDP elsewhere), while increases in imports subtract from GDP because they represent either consumption or investment that was added to another GDP component that shouldn’t have been because it was not produced here. Thus the 2nd quarter increase in real exports added 1.12 percentage points to 2nd quarter GDP, after the first quarter increase added 0.43 percentage points to first quarter GDP. On the other hand, since imports subtract from GDP, their increase at a 0.5% rate subtracted 0.06 percentage points from 2nd quarter GDP, after first quarter imports had subtracted 0.45 percentage points from that quarter’s growth. As a result, our improving trade balance added a total of 1.06 percentage points to 2nd quarter GDP, after a revised trade deficit had subtracted 0.02 percentage points from the first quarter’s growth..

Finally, real consumption and investment by branches of government rose at a 2.1% annual rate in the 2nd quarter, after increasing at a 1.5% rate in the first quarter, as real federal government consumption and investment grew at a 3.5% rate and real state and local consumption and investment grew at a 1.4% rate. Inflation adjusted federal spending for defense rose at a 5.5% rate and that added 0.21 percentage points to 2nd quarter GDP growth, while real non-defense federal consumption and investment grew at a 0.6% rate and added 0.02 percentage points to GDP. Note that federal government outlays for social insurance are not included in this GDP component; rather, they are included within personal consumption expenditures only when such funds are spent on goods or services, indicating an increase in the output of those goods or services. Meanwhile, real state and local government investment and consumption expenditures, which grew at a 1.4% annual rate, added 0.15 percentage points to the quarter’s growth rate, as an increase in real state and local investment at a 4.8% rate accounted for three-fifths of that increase…

(Note: the above was excerpted from my weekly economic synopsis at Marketwatch 666)