Summary
Last Wednesday, the Commerce Department released its third or "final" estimate of fourth-quarter 2004 gross domestic product. According to the report, real GDP grew at a 3.8% annual rate during the period, the same figure reported in late February, when Commerce issued its "preliminary" estimate. There were some internal adjustments to the numbers, however.
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General Observations
In last Wednesday's report, the Commerce Department indicated that fourth-quarter real GDP expanded at an annual rate of 3.8%, the same figure reported in late February. This left fourth-quarter activity below the 4.0% rate of last year's September quarter.
After excluding $12.7 billion of inventory accumulation, real final sales advanced at a 3.4% rate during the fourth quarter. This was down materially from a 5.0% rate during last year's third quarter. Many analysts (I among them) view real final sales as a better gauge of overall economic performance than the "top-line" measure of real GDP.
Although the most current release covering the fourth quarter showed a small 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 2.3% and 2.9% during last year's final quarter, revised up a bit from 2.1% and 2.8% in the prior 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% 2.3%
[2] 3.9% 0.4% 1.6% 1.2% 3.4% 3.5% 2.0% 2.9%
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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 reported decline in inflation during last year's third quarter 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% 6.2%
Real 4.5% 2.8% 4.0% 3.8%
R/N 0.61 0.46 0.73 0.61
===========================================
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
===========================================
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 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 $103.3 billion or about 0.948%. 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 $413.6 billion, or 3.9%. The respective numbers: 4Q2004 = $10994.3 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 $460.6 billion or 4.4%. The respective numbers: 2004 = $10841.9 billion, 2003 = $10381.3 billion.
Four of the six primary GDP categories added to growth in the "final" versus the "preliminary" estimate of fourth-quarter activity. In order of dollar contribution, these were:
(1) Net exports (+$2.3 billion, by virtue of a reported
narrowing in the trade deficit by that amount),
(2) residential fixed investment (housing, +$1.7
billion),
(3) nonresidential fixed investment (capital spending,
+$1.6 billion),
(4) personal consumption expenditures (+$0.8 billion).
Two of the six primary categories subtracted from growth:
(1) Government spending (minus $1.6 billion),
(2) inventory change (minus $3.8 billion).
NOTE: For a historical perspective on GDP methodology, etc., see John Williams' excellent work at: Gross Domestic Product.
The following table breaks out in greater detail many of the numbers discussed above.
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FINAL ESTIMATE OF FOURTH-QUARTER 2004
REAL GROSS DOMESTIC PRODUCT (Released
3/30 -- Billions of 2000 Chained Dollars
at Seasonally Adjusted Annual Rates)
--------------------------------------------------
4Q2004 3Q2004 Change/
Final Final Impact
------------------------
Real GDP 10994.3 10891.0 3.8%
Inventory Change 47.2 34.5 +$12.7
Real Final Sales 10945.5 10854.7 3.4%
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Components of GDP
-----------------
Personal Consumption 7747.0 7667.8 4.2%
Nonres. Fixed Investment* 1288.3 1245.3 14.5%
Resid. Fixed Investment 570.6 565.9 3.4%
Net Exports 621.1 -583.2 -$37.9
Government Purchases* 1954.0 1949.9 0.8%
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Implicit Price Deflators:
Gross Domestic Product 2.3% 1.4% --
Gross Domestic Purchases 2.9% 2.0% --
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*MEMO ITEMS
-----------
Government Purchases
--------------------
Total 1954.0 1949.9 0.8%
State & Local 1225.1 1223.2 0.6%
Federal 728.8 726.6 1.2%
National Defense 490.7 491.5 -0.6%
Nonresidential
Fixed Investment
----------------
Total 1288.3 1245.3 14.5%
Structures 242.3 241.0 2.2%
Equipment & Software 1059.5 1015.6 18.4%
Info. Processing
Equip. & Software 599.5 575.6 17.7%
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MAJOR GDP COMPONENTS -- CHANGES BETWEEN
"FINAL" AND "PRELIMINARY" 4Q2004 ESTIMATES
(Billions of 2000 Chained Dollars at
Seasonally Adjusted Annual Rates)
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4Q2004 4Q2004
Final Prel. Change
----------------------------
Real GDP 10994.3 10993.3 1.0
Inventory Change 47.2 51.0 -3.8
Real Final Sales 10945.5 10940.7 4.8
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Personal Consumption 7747.0 7746.2 0.8
Nones. Fixed Invest. 1288.3 1286.7 1.6
Resid. Fixed Invest. 570.6 568.9 1.7
Net Exports -621.1 -623.4 2.3
Govt. Purchases 1954.0 1955.6 -1.6
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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% 3.8%
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.
----------------------------------------
1929-2002 1959-1992 1992-2002
---------------------------------
After 3.4% 3.4% 3.2%
Before 3.4% 3.4% 3.2%
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