Summary
Last Friday, the Commerce Department released its second or "preliminary" estimate of fourth-quarter 2004 gross domestic product. According to the report, real GDP grew at a 3.8% annual rate during the period, versus the 3.1% rate initially reported in late January. In reality, the higher number was not as fundamentally strong as this revision suggested. Also last week, the Labor Department reported that consumer prices rose 0.1% during January.
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GDP - General Observations
In last Friday's report, the Commerce Department indicated that fourth-quarter real GDP expanded at an annual rate of 3.8%, up from the initial estimate of 3.1%, reported on 1/28. This revision still left activity below the 4.0% rate of last year's third quarter.
Excluding $16.5 billion of inventory accumulation, real final sales advanced at a 3.2% rate during the fourth quarter. This was down materially from a 5.0% rate during last year's September quarter. Many analysts (I among them) view real final sales as a better guide to overall economic performance than the "top-line" measure of real GDP.
Although the most current release covering the fourth quarter showed an increase in the GDP inflation measures, they continued to be reported at levels that appear out of touch with reality. According to Commerce, the implicit price deflators for GDP and for gross domestic purchases came in at respective rates of 2.1% and 2.8% during last year's final quarter, revised up a bit from 2.0% and 2.7% in the initial release.
The latest numbers compare with respective rates of 1.4% and 2.0% during 2004's September quarter. Those results were particularly difficult to justify!
Here are how the key GDP inflation measures performed over the last eight quarters:
2003 2004
---------------------- ----------------------
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% 2.1%
[2] 3.9% 0.4% 1.6% 1.2% 3.4% 3.5% 2.0% 2.8%
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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. The up-tick in reported nominal growth for the most recent period reversed two consecutive quarters of decline in this series.
As a graphic example of the inverse relationship between inflation and real growth, note in the numbers below 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% 6.0%
Real 4.5% 2.8% 4.0% 3.9%
R/N 0.61 0.46 0.73 0.65
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GDP Def. 2.7% 3.2% 1.4% 2.1%
PCE Def. 3.4% 3.5% 2.0% 2.8%
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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
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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 revised fourth-quarter numbers with the Commerce Department's final estimate for last year's third quarter, real GDP was up $102.3 billion or about 0.939%. Add one, then raise this to the fourth power, and you get the rounded annual rate of change of 3.8%.
Versus 2003's fourth quarter, 4Q2004 real GDP rose $412.6 billion, or 3.9%. The respective numbers: 4Q2004 = $10993.3 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 $460.3 billion or 4.4%. The respective numbers: 2004 = $10841.6 billion, 2003 = $10381.3 billion.
Five of the six primary GDP categories added to growth in the most recent versus the initial estimate of fourth-quarter activity. In order of dollar contribution, these were:
(1) nonresidential fixed investment (capital spending,
+$10.4 billion),
(2) net exports (+$8.5 billion, by virtue of a reported narrowing in the trade deficit by that amount),
(3) inventory change (+$5.2 billion),
(4) residential fixed investment (housing, +$2.6 billion),
(5) government spending (+$1.1 billion).
One of the six primary categories subtracted from growth. Personal consumption expenditures were revised down by the substantial amount of $9.2 billion.
NOTE: For a historical perspective on GDP methodology, etc., see John Williams' excellent piece "Gross Domestic Product".
The following table breaks out in greater detail many of the numbers discussed above.
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PRELIMINARY ESTIMATE OF FOURTH-QUARTER 2004
REAL GROSS DOMESTIC PRODUCT (Released
2/25 -- Billions of 2000 Chained Dollars
at Seasonally Adjusted Annual Rates)
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4Q2004 3Q2004 Change/
Prelim. Final Impact
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Real GDP 10993.3 10891.0 3.8%
Inventory Change 51.0 34.5 +$16.5
Real Final Sales 10940.7 10854.7 3.2%
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Components of GDP
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Personal Consumption 7746.2 7667.8 4.2%
Nonres. Fixed Investment* 1286.7 1245.3 14.0%
Resid. Fixed Investment 568.9 565.9 2.1%
Net Exports -623.4 -583.2 -$40.2
Government Purchases* 1955.6 1949.9 1.2%
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Implicit Price Deflators:
Gross Domestic Product 2.1% 1.4% --
Gross Domestic Purchases 2.8% 2.0% --
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*MEMO ITEMS
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Government Purchases
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Total 1955.6 1949.9 1.2%
State & Local 1225.7 1223.2 0.8%
Federal 729.7 726.6 1.7%
National Defense 491.1 491.5 -0.3%
Nonresidential
Fixed Investment
----------------
Total 1286.7 1245.3 14.0%
Structures 241.8 241.0 1.3%
Equipment & Software 1058.5 1015.6 18.0%
Info. Processing
Equip. & Software 598.7 575.6 17.0%
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MAJOR GDP COMPONENTS -- CHANGES BETWEEN
"PRELIMINARY" AND "ADVANCE" 4Q2004 ESTIMATES
(Billions of 2000 Chained Dollars at
Seasonally Adjusted Annual Rates)
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4Q2004 4Q2004
Prelim. Advance Change
----------------------------
Real GDP 10993.3 10975.7 17.6
Inventory Change 51.0 45.8 5.2
Real Final Sales 10940.7 10928.1 12.6
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Personal Consumption 7746.2 7755.4 -9.2
Nones. Fixed Invest. 1286.7 1276.3 10.4
Resid. Fixed Invest. 568.9 566.3 2.6
Net Exports -623.4 -631.9 8.5
Govt. Purchases 1955.6 1954.5 1.1
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REAL GROSS DOMESTIC PRODUCT (SEASONALLY
ADJUSTED ANNUAL RATES, 2000 CHAINED DOLLARS)
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Year Q1 Q2 Q3 Q4
----------------------------------------
2004 4.5% 3.3% 4.0% 3.8%
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.
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1929-2002 1959-1992 1992-2002
---------------------------------
After 3.4% 3.4% 3.2%
Before 3.4% 3.4% 3.2%
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January Consumer Prices
Per last Wednesday's report from the Labor Department, the Consumer Price Index rose 0.1% during January. This resulted in a reported year-over-year gain of 2.9%, with the CPI rising at an annual rate of 1.3% over the trailing three months.
Excluding food and energy, the so-called "core" rate, the CPI rose 0.2% in January. Year over year, it was up 2.2%, and it rose at an annual rate of 2.0% over the last three months.
Last week's report included numerous revisions to prior data. These have been incorporated into the tables below.
The first table is a regular, and it examines three of the four measures we use in our "Inflation Watch" chart, found on the GRA website's home page.
Consumer Producer Import
Price Index Price Index Prices
Month/ ---------------------------------------
Year Y/Y L3Mos* Y/Y L3Mos* Y/Y L3Mos*
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01/05 2.9% 1.3% 4.2% 2.7% 6.0% -3.4%
12/04 3.4% 3.4% 4.3% 7.2% 6.7% -0.4%
11/04 3.6% 4.1% 5.1% 9.8% 9.0% 7.5%
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*Trailing three-month com-
pound annual rate of change.
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The next table expands the CPI and PPI to include their "core" rates (excluding food and energy), adds the CRB Futures Index (the fourth measure we use in the "Inflation Watch" chart), and carries the data back almost 25 year, to 1980, using five-year increments from 1980 through 2000, then annual data through 2004.
Producer Price
Consumer Price Index Index (Finished Import CRB Fut.
(All Urban) Y/Y Change Goods) Y/Y Change Prices Index
---------------------- ----------------- ------ --------
All Excl. Food All Excl. Food Y/Y Y/Y
Year Items & Energy Items & Energy Change Change
---------------------- ----------------- ------- -------
2004 3.4% 2.2% 4.3% 2.2% 6.7% 11.2%
2003 1.9% 1.1% 4.0% 1.0% 2.4% 8.9%
2002 2.4% 2.0% 1.2% -0.6% 4.2% 23.0%
2001 1.5% 2.7% -1.8% 1.0% -9.1% -16.3%
2000 3.4% 2.6% 4.1% 1.6% 3.2% 11.1%
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1995 2.5% 3.0% 2.1% 2.6% 2.6% 2.8%
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1990 6.3% 5.3% 5.6% 3.5% 7.4% -3.2%
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1985 3.8% 4.3% 1.9% 2.6% 1.0% -6.1%
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1980 12.4% 12.2% 11.7% 10.6% NA 9.6%
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From 1990 forward, lots of inflation has been "wrung out" of the Consumer Price Index as the sole result of various methodology changes. This clearly is the reason that few people I know can any longer identify the increase in their personal cost of living with the changes portrayed by the current CPI.
For those people who have yet to visit John Williams' website, this is a good time to do so John Williams' Shadow Government Statistics. Have a look at the chart found on the site's home page, then try to find time to read the article "Consumer Price Index" in the right-hand column under the overall heading of "A Primer on Government Economic Reports."
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