Summary
Yesterday, the Commerce Department released its third or "final" estimate of third-quarter gross domestic product. According to the report, real GDP grew at a 4.0% rate during the September quarter, 0.1% higher than Commerce's second or "preliminary" estimate of 3.9%, released on 11/30. The GDP inflation measures continued to appear, let's just say -- "highly suspect."
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General Observations
In yesterday's report, the Commerce Department indicated that third-quarter real GDP grew at an annual rate of 4.0%, slightly faster than the department's preliminary estimate of 3.9%, released on 11/30. (The "advance" estimate of 2004's fourth-quarter GDP is due for release on 1/28/05).
The numbers that continued to jump off the page in the current release were the GDP inflation measures, with the implicit price deflators for GDP and for gross domestic purchases indicated at rates of 1.4% and 2.0%, respectively. While these were raised modestly from the preliminary estimates of 1.3% and 1.8%, they simply are not consistent with reality!
The respective results for the second quarter were 3.2% and 3.5%. For the first quarter they were 2.7% and 3.4%. An argument can certainly made that these also were on the low side, but the numbers were a bit easier to swallow, and they also were trending in a sensible manner and direction. It is difficult to accept there was a genuine pullback in inflation in the third quarter from the second quarter, no less one as large as 1.8%.
And on this point, it is essential to remember that there is virtually a one-for-one inverse relationship between the GDP implicit price deflator and real GDP. In other words, a given decline in reported inflation comes through as a similar increase in real gross domestic product. If in the third quarter the GDP implicit price deflator had come in at the second quarter's 3.2%, real GDP would have been around 2.3%, versus the 4.0% that was reported.
The following table breaks out these trends over the last 11 quarters. Of particular interest regarding the most recent period is that it represents the second quarter in a row in which there was a meaningful drop in nominal (pre-inflation) growth. Moreover, the third quarter's reported decline in inflation accounted for far more than 100% of the increase in real growth between the second and third quarters.
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NOMINAL AND REAL GROSS DOMESTIC PRODUCT
(SAAR, 2000 Chained Dollars); RATIO OF REAL
TO NOMINAL; IMPLICIT PRICE DEFLATORS FOR
GDP AND FOR GROSS DOMESTIC PURCHASES
------------------------------------------------
Year Q1 Q2 Q3 Q4
------------------------------------------------
2004 Nominal 7.4% 6.1% 5.5% NA
Real 4.5% 2.8% 4.0% --
R/N 0.61 0.46 0.73 --
===========================================
GDP Def. 2.7% 3.2% 1.4% --
PCE Def. 3.4% 3.5% 2.0% --
------------------------------------------------
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. 2.9% 1.1% 1.3% 1.4%
PCE Def. 3.9% 0.4% 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. 1.0% 1.8% 1.3% 2.0%
PCE Def. 0.8% 2.8% 1.4% 1.9%
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The Revised Third-Quarter Numbers
The three-month period ended September was the 12th consecutive quarter of reported real GDP expansion.
The final estimate of growth at a 4.0% annual rate was slightly better than the consensus forecast, which was looking for a 3.9% rate, unchanged from the preliminary estimate.
In comparing final third-quarter numbers with the Commerce Department's final estimate for this year's second quarter, real GDP was up $106.3 billion or about 0.986%. Add one, then raise this to the fourth power, and you get the rounded annual rate of change of 4.0%.
Versus 2003's third quarter, 3Q2004 real GDP rose $418.2 billion, or 4.0%. The respective numbers: 3Q2004 = $10891.0 billion; 3Q2003 = $10472.8 billion.
Two of the six primary GDP categories added to growth in the final versus preliminary estimates of activity during the third quarter, while one was unchanged. In order of their dollar contribution, they were: (1) net exports (+$4.8 billion, by virtue of a reported narrowing in the deficit from $588.0 billion to $583.2 billion), and (2) personal consumption expenditures (+$1.0 billion). Nonresidential fixed investment (capital spending) was unchanged.
The three primary categories subtracting from growth after revision, in order of their dollar contribution, were: (1) government spending (minus $2.5 billion), (2) inventory change (minus $1.4 billion), and (3) residential fixed investment (housing, minus $0.2 billion).
(NOTE: For a historical perspective on GDP methodology, etc., see John Williams' excellent work at: "Government Economic Reports: Things You've Suspected but Were Afraid to Ask! -- Gross Domestic Product".
The following table breaks out in greater detail some of the numbers discussed above.
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FINAL ESTIMATE OF THIRD-QUARTER 2004
REAL GROSS DOMESTIC PRODUCT (Released
12/22 -- Billions of 2000 Chained Dollars
at Seasonally Adjusted Annual Rates)
--------------------------------------------------
3Q2004 2Q2004 Change/
Final Final Impact
------------------------
Real GDP 10891.0 10784.7 4.0%
Inventory Change 34.5 61.1 -$26.6
Real Final Sales 10854.7 10722.3 5.0%
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Components of GDP
-----------------
Personal Consumption 7667.8 7572.4 5.1%
Nonres. Fixed Investment* 1245.3 1207.9 13.0%
Resid. Fixed Investment 565.9 563.6 1.6%
Net Exports -583.2 -580.3 -$2.9
Government Purchases* 1949.9 1946.5 0.7%
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Implicit Price Deflators:
Gross Domestic Product 1.4% 3.2% --
Gross Domestic Purchases 2.0% 3.5% --
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*MEMO ITEMS
-----------
Government Purchases
--------------------
Total 1949.9 1946.5 0.7%
State & Local 1223.2 1228.3 -1.7%
Federal 726.6 718.1 4.8%
National Defense 491.5 479.9 10.0%
Nonresidential
Fixed Investment
----------------
Total 1245.3 1207.9 13.0%
Structures 241.0 241.7 -1.2%
Equipment & Software 1015.6 975.5 17.5%
Info. Processing
Equip. & Software 575.6 565.4 7.4%
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MAJOR GDP COMPONENTS -- CHANGES BETWEEN
"FINAL" AND "PRELIMINARY" 3Q2004 ESTIMATES
(Billions of 2000 Chained Dollars at
Seasonally Adjusted Annual Rates)
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3Q2004 3Q2004
Final Prel. Change
----------------------------
Real GDP 10891.0 10889.7 1.3
Inventory Change 34.5 35.9 -1.4
Real Final Sales 10854.7 10852.0 2.7
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Personal Consumption 7667.8 7666.8 1.0
Nones. Fixed Invest. 1245.3 1245.3 0.0
Resid. Fixed Invest. 565.9 566.1 -0.2
Net Exports -583.2 -588.0 4.8
Govt. Purchases 1949.9 1952.4 -2.5
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REAL GROSS DOMESTIC PRODUCT (SEASONALLY
ADJUSTED ANNUAL RATES, 2000 CHAINED DOLLARS)
--------------------------------------------
Year Q1 Q2 Q3 Q4
----------------------------------------
2004 4.5% 3.3% 4.0% --
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%
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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%
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