Summary
On Friday, the Commerce Department released its first or "advance" estimate of fourth-quarter gross domestic product. According to the report, real GDP grew at a 3.1% rate during last year's fourth quarter, versus a 4.0% rate during the three months ended last September. Even with the positive bias some of the numbers impart, the overall result portrays an economy not as robust as many are claiming.
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General Observations
In Friday's report, the Commerce Department indicated that fourth-quarter real GDP expanded at an annual rate of 3.1%, weaker than a consensus forecast that was looking for something around 3.5%. The fourth-quarter result was noticeably below that of last year's third quarter, when GDP grew at a 4.0% rate.
When you exclude $11.3 billion of inventory accumulation, real final sales advanced at a 2.7% rate during the fourth quarter. This was down very sharply from a 5.0% rate during last year's September quarter. Many analysts view real final sales as a better guide to overall economic performance than the "top-line" measure of real GDP.
Although the release covering the latest quarter indicates an increase in the GDP inflation measures, they continue to be reported at levels that are simply inconsistent with reality. According to Commerce, the implicit price deflators for GDP and for gross domestic purchases came in at respective rates during last year's fourth quarter of 2.0% and 2.7%, versus 1.4% and 2.0% during 2004's September quarter.
Here are how the key GDP inflation measures performed over the last eight quarters:
2003 2004
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1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
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[1] 2.9% 1.1% 1.3% 1.4% 2.7% 3.2% 1.4% 2.0%
[2] 3.9% 0.4% 1.6% 1.2% 3.4% 3.5% 2.0% 2.7%
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Implicit price deflators for:
[1]GDP; [2]gross domestic purchases.
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Bear in mind that there is virtually a one-for-one inverse relationship between the GDP implicit price deflator and real GDP. A given decline in reported inflation translates into a similar increase in real gross domestic product. Therefore, understated inflation automatically overstates real growth.
The table below breaks out these relationships over the last three years. Of particular interest regarding the most recent three-month period is that it represented the third consecutive quarter in which there was a decline in nominal (before inflation adjustment) growth. Moreover, note that 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
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Year Q1 Q2 Q3 Q4
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2004 Nominal 7.4% 6.1% 5.5% 5.2%
Real 4.5% 2.8% 4.0% 3.1%
R/N 0.61 0.46 0.73 0.60
===========================================
GDP Def. 2.7% 3.2% 1.4% 2.0%
PCE Def. 3.4% 3.5% 2.0% 2.7%
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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%
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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 Fourth-Quarter Numbers
The three-month period ended December was the 13th consecutive quarter of reported real GDP expansion.
In comparing the initial fourth-quarter numbers with the Commerce Department's final estimate for last year's third quarter, real GDP was up $84.7 billion or about 0.777%. Add one, then raise this to the fourth power, and you get the rounded annual rate of change of 3.1%.
Versus 2003's fourth quarter, 4Q2004 real GDP rose $395.0 billion, or 3.7%. The respective numbers: 4Q2004 = $10975.7 billion; 4Q2003 = $10580.7 billion.
Measured on the basis of the average of last year's four quarters divided by the average of 2003's four quarters, real GDP expanded by $455.9 billion or 4.4%. The respective numbers: 2004 = $10837.2 billion, 2003 = $10381.3 billion.
Five of the six primary GDP categories added to growth in the initial estimate of activity for 2004's fourth quarter versus the final estimate of activity for the third quarter. In order of their dollar contribution, they were:
(1) personal consumption expenditures (+$87.6 billion),
(2) nonresidential fixed investment (capital spending, +$31.0 billion),
(3) inventory change ($+11.3 billion),
(4) government spending (+$4.6 billion) and
(5) residential fixed investment (housing, +$0.4 billion).
The one category subtracting from growth, by an amount of $48.7 billion, was net exports. This occurred by virtue of a widening in the trade deficit by that amount.
NOTE: For a historical perspective on GDP methodology, etc., see John Williams' excellent work at:
www.gillespieresearch.com/cgi-bin/bgn/article/id=344
The following table breaks out in greater detail many of the numbers discussed above.
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ADVANCE ESTIMATE OF FOURTH-QUARTER 2004
REAL GROSS DOMESTIC PRODUCT (Released
1/28/04 -- Billions of 2000 Chained Dollars
at Seasonally Adjusted Annual Rates)
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4Q2004 3Q2004 Change/
Advance Final Impact
------------------------
Real GDP 10975.7 10891.0 3.1%
Inventory Change 45.8 34.5 +$11.3
Real Final Sales 10928.1 10854.7 2.7%
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Components of GDP
-----------------
Personal Consumption 7755.4 7667.8 4.6%
Nonres. Fixed Investment* 1276.3 1245.3 10.3%
Resid. Fixed Investment 566.3 565.9 0.3%
Net Exports -631.9 -583.2 -$48.7
Government Purchases* 1954.5 1949.9 0.9%
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Implicit Price Deflators:
Gross Domestic Product 2.0% 1.4% --
Gross Domestic Purchases 2.7% 2.0% --
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*MEMO ITEMS
-----------
Government Purchases
--------------------
Total 1954.5 1949.9 0.9%
State & Local 1224.9 1223.2 0.6%
Federal 729.5 726.6 1.6%
National Defense 491.5 491.5 0.0%
Nonresidential
Fixed Investment
----------------
Total 1276.3 1245.3 10.3%
Structures 238.5 241.0 -4.1%
Equipment & Software 1051.5 1015.6 14.9%
Info. Processing
Equip. & Software 599.4 575.6 17.6%
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MAJOR GDP COMPONENTS -- CHANGES BETWEEN
"ADVANCE" 4Q2004 AND "FINAL" 3Q2004 ESTIMATES
(Billions of 2000 Chained Dollars at
Seasonally Adjusted Annual Rates)
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4Q2004 3Q2004
Advance Final Change
----------------------------
Real GDP 10975.7 10891.0 84.7
Inventory Change 45.8 34.5 11.3
Real Final Sales 10928.1 10854.7 73.4
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Personal Consumption 7755.4 7667.8 87.6
Nones. Fixed Invest. 1276.3 1245.3 31.0
Resid. Fixed Invest. 566.3 565.9 0.4
Net Exports -631.9 -583.2 -48.7
Govt. Purchases 1954.5 1949.9 4.6
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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% 3.1%
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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