Introduction
On Friday morning, the Commerce Department released its advance estimate of second-quarter 2004 GDP, along with revisions going back to and including the first quarter of 2001. Based on Friday's report, real gross domestic product grew at an annual rate of 3.0% during the June quarter. This compared with a revised rate of 4.5% during the first quarter, a number that stood at 3.9% prior to revision.
_____
By way of introduction, here are some thoughts expressed in the missive from last Friday (7/30, Stocks: S&P 1,080, Part II"):
"There was a discernable slowing in certain areas of the economy during June. It will be interesting to see if this shows up in today's second-quarter numbers.
"However, here is where a little intrigue could enter the picture later today. In addition to releasing its advance GDP estimate for the second quarter, Commerce will also release its annual revision of prior years' results. These revisions will go back to the first quarter of 2001 ... Notice the beginning of the revision period. It just happens to coincide with the start of the Bush Presidency. Thus, there is a chance today's revisions could reflect a little election-year hanky-panky.
"I don't expect that the overall revision will change total GDP growth very much over the entire period involved. But what you could get is a reconfiguration that results in a little back-loading of weakness. In turn, the resulting lower base numbers would magnify growth over more recent periods."
Total GDP growth over the revision period did not change very much, but there was indeed an interesting reconfiguration. First, here are the real growth results (at annual rates), before and after revision.
--------------------------------------------
REAL GROSS DOMESTIC PRODUCT (SEASONALLY
ADJUSTED ANNUAL RATES, 2000 CHAINED DOLLARS)
--------------------------------------------
Year Q1 Q2 Q3 Q4
-------------------------------------------
2004 New 4.5% 3.0% -- --
Old 3.9% NA -- --
-------------------------------------------
2003 New 1.9% 4.1% 7.4% 4.2%
Old 2.0% 3.1% 8.2% 4.1%
-------------------------------------------
2002 New 3.4% 2.4% 2.6% 0.7%
Old 4.7% 1.9% 3.4% 1.3%
-------------------------------------------
2001 New -0.5% 1.2% -1.4% 1.6%
Old -0.2% -0.6% -1.3% 2.0%
-------------------------------------------
Most interesting in the above was the removal of the historical definition of an "official" recession (two or more quarters of negative real growth). This was accomplished by massaging the numbers to take out 2Q2001's minus 0.6% and turning it into +1.2%. But before I get too conspiratorial in my thinking on the political hanky-panky front, the most recent quarter's 3.0% growth rate is probably be more injurious from a political perspective than getting rid of 2001's recession.
_____
A More Specific Look at the Second Quarter
In its release of last Friday, the Commerce Department reported that real GDP grew at an annual rate of 3.0% during the second quarter, down substantially from the first quarter's revised 4.5% rate of growth.
The three-month period ended June was the 11th consecutive quarter of reported real growth. However, the advance estimate of 3.0% annual growth was noticeably below the consensus forecast, which looked for something around a 3.7% rate.
In comparing the advance second-quarter numbers with the Commerce Department's final estimate for 2004's first quarter, real GDP was up $80.5 billion or about 0.753%. Add one, then raise this to the fourth power, and you get the rounded annual rate of change of 3.0%.
Versus 2003's second quarter, real GDP rose $490.6 billion, or 4.8%. The respective numbers: 2Q2004 = $10778.0 billion; 2Q2003 = $10287.4 billion.
Five of the six primary categories added to growth in the second-quarter advance estimate versus the first quarter's final estimate. In order of their dollar contribution, they were: (1) nonresidential fixed investment (capital spending, +$25.1 billion), (2) residential fixed investment (housing, +$19.8 billion), (3) personal consumption expenditures (+$19.5 billion), (4) government purchases (+$11.0 billion), and (5) inventory change (+$7.5 billion).
The lone primary category subtracting from growth during the most recent period was net exports (minus $2.7 billion, by virtue of a reported widening in the deficit from $550.1 billion to $552.8 billion.)
Additional items of note:
(1) Many analysts look at "real final sales" as a critical number, since it measures GDP growth with the effect of changes in inventory levels removed. This makes RFS a purer gauge with which to assess "core" growth.
During 2004 so far, growth in real GDP has been bolstered materially by inventory accumulation, at respective first- and second-quarter annual rates of $40.0 billion and $47.5 billion. In turn, this resulted in overall growth in real gross domestic product at 4.5% and 3.0% annual rates, while the expansion in real final sales were at respective rates of 3.3% and 2.8%.
(2) The paltry 1.0% rate of growth in personal consumption expenditures during the second quarter fits well with some of the more important views I expressed about the economy in the missive published on 7/20 ("Midyear Economic & Market Review: More Disappointments Ahead?"). From the third quarter of 2003 through this year's second quarter, inclusive, growth in PCEs have been reported at annual rates of 5.0%, 3.6%, 4.1% and 1.0%, respectively. This is a clear deceleration in what is far and way the largest component of gross domestic product.
(3) Friday's report showed a sizable rise in nonresidential fixed investment (capital spending) during the second quarter, with growth at a 8.8% annual rate, versus a first-quarter rate of 4.2%. For this year's first six months, NRFI expanded at a 6.5% rate.
Wall Street bulls are desperate for a capital-spending "boom," and some analysts are opining one is underway. I doubt this, however. Instead, I believe the respectable expansion seen in tech-equipment and related purchases merely reflects "plug" buying -- more the necessary (versus the discretionary) replacing of worn out equipment from the Y2K-induced spending binge of approximately five years ago.
(4) Friday's report showed sizable increases during this year's first two quarters in key GDP inflation measures. The deflators used for overall GDP and for personal consumption expenditures were reported for the second quarter at respective annual rates of 3.2% and 3.3%. For 2003's fourth quarter, these measures were reported at much lower rates of 1.6% and 1.2%, respectively. So what I think we may be seeing here is at least a twinge of the stagflation I've vociferously warned about in past forecasting work. The following table shows quite clearly the emergence of this trend over the past several quarters.
------------------------------------------------
NOMINAL AND REAL GROSS DOMESTIC PRODUCT
(SAAR, 2000 Chained Dollars); RATIO OF REAL
TO NOMINAL; GDP IMPLICIT PRICE DEFLATOR;
PERSONAL CONSUMPTION EXPENDITURE DEFLATOR
------------------------------------------------
Year Q1 Q2 Q3 Q4
------------------------------------------------
2004 Nominal 7.4% 6.3% NA NA
Real 4.5% 3.0% -- --
R/N 0.61 0.48 -- --
===========================================
GDP Def. 2.8% 3.2% -- --
PCE Def. 3.3% 3.3% -- --
------------------------------------------------
2003 Nominal 4.9% 5.3% 8.8% 5.7%
Real 1.9% 4.1% 7.4% 4.2%
R/N 0.39 0.77 0.84 0.74
===========================================
GDP Def. 2.7% 1.1% 1.4% 1.6%
PCE Def. 3.2% 0.7% 1.6% 1.2%
------------------------------------------------
2002 Nominal 4.4% 4.2% 3.9% 2.7%
Real 3.4% 2.4% 2.6% 0.7%
R/N 0.77 0.57 0.67 0.26
===========================================
GDP Def. 1.4% 1.5% 1.7% 2.0%
PCE Def. 0.9% 2.9% 2.0% 1.4%
------------------------------------------------
The following table breaks out in greater detail some of the numbers discussed in earlier text.
(NOTE: All the tables in this missive will be added to the "Data & Charts" archives section of the GRA website.)
--------------------------------------------------
ADVANCE ESTIMATE OF SECOND-QUARTER 2004
REAL GROSS DOMESTIC PRODUCT (Released
07/30 -- Billions of 2000 Chained Dollars
at Seasonally Adjusted Annual Rates)
--------------------------------------------------
2Q2004 1Q2004 Change/
Advance Final Impact
------------------------
Real GDP 10778.0 10697.5 3.0%
Inventory Change 47.5 40.0 $7.5
Real Final Sales 10728.8 10655.8 2.8%
--------------------------------------------------
Components of GDP
-----------------
Personal Consumption 7562.5 7543.0 1.0%
Nonres. Fixed Investment* 1198.1 1173.0 8.8%
Resid. Fixed Investment 562.3 542.5 15.4%
Net Exports -552.8 -550.1 -$2.7
Government Purchases* 1946.8 1935.8 2.3%
--------------------------------------------------
Implicit Price Deflators:
Gross Domestic Product 3.2% 2.8% --
Gross Domestic Purchases 3.3% 3.3% --
--------------------------------------------------
*MEMO ITEMS
-----------
Government Purchases
--------------------
Total 1946.8 1935.8 2.3%
State & Local 1228.7 1222.4 2.1%
Federal 718.1 713.3 2.7%
National Defense 479.9 477.6 1.9%
Nonresidential
Fixed Investment
----------------
Total 1198.1 1173.0 8.8%
Structures 240.7 237.7 5.1%
Equipment & Software 966.4 943.7 10.0%
Info. Processing
Equip. & Software 565.0 547.0 13.8%
---------------------------------------------------
MAJOR GDP COMPONENTS -- CHANGES BETWEEN
"ADVANCE" 2Q2004 AND "FINAL" 1Q2004 ESTIMATES
(Billions of 2000 Chained Dollars at
Seasonally Adjusted Annual Rates)
---------------------------------------------------
2Q2004 1Q2004
Advance Final Change
----------------------------
Real GDP 10778.0 10697.5 80.5
Inventory Change 47.5 40.0 7.5
Real Final Sales 10728.8 10655.8 73.0
---------------------------------------------------
Personal Consumption 7562.5 7543.0 19.5
Nones. Fixed Invest. 1198.1 1173.0 25.1
Resid. Fixed Invest. 562.3 542.5 19.8
Net Exports -552.8 -550.1 -2.7
Govt. Purchases 1946.8 1935.8 11.0
---------------------------------------------------
REAL GROSS DOMESTIC PRODUCT (SEASONALLY
ADJUSTED ANNUAL RATES, 2000 CHAINED DOLLARS)
--------------------------------------------
Year Q1 Q2 Q3 Q4
----------------------------------------
2004 4.5% 3.0% -- --
2003 1.9% 4.1% 7.4% 4.2%
2002 3.4% 2.4% 2.6% 0.7%
2001 -0.5% 1.2% -1.4% 1.6%
2000 1.0% 6.4% -0.5% 2.1%
1999 3.4% 3.4% 4.8% 7.3%
1998 4.5% 2.7% 4.7% 6.2%
-----------------------------------------
MEMO ITEM: Annual change in real GDP
before and after the "comprehensive
revision" published by the Commerce
Department on 12/10/03.
----------------------------------------
1929-2002 1959-1992 1992-2002
---------------------------------
After 3.4% 3.4% 3.2%
Before 3.4% 3.4% 3.2%
---------------------------------------------------
|
