Summary
Yesterday morning, the Commerce Department released its "preliminary" (second) estimate of first-quarter 2005 gross domestic product. According to the report, real GDP grew at a 3.5% annual rate for the period, 0.4% faster than originally estimated at the end of April. However, the faster pace of growth did not exhibit much overall "gusto."
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General Observations
* In yesterday's report, the Commerce Department indicated that first-quarter 2005 real gross domestic product expanded at an annual rate of 3.5%, 0.4% faster than originally estimated in late April. But this was still slower than the 3.8% rate generated during last year's fourth quarter. And reported GDP grew at a 4.0% rate during last year's September quarter. Thus, the current performance represented the second consecutive period of slower real growth.
* Revised growth during the first quarter was a bit lower than a consensus forecast that was looking for something around 3.6%.
* Higher is higher, I suppose, but yesterday's net upward revision did little to improve the substantive strength of first-quarter GDP, versus the Commerce Department's first estimate of late April. The April report showed some critical weakness; yesterday's report did little to mitigate it.
* For instance, many analysts were looking for improvement from the earlier estimate's weak capital spending numbers. Not only did this not materialize, yesterday's report showed an even weaker result.
* On the other hand, inventory build during the first quarter was revised downward by a meaningful $11.8 billion. Although this revision hurt "top-line" GDP growth, it did improve the performance of real final sales in the process. "Final sales" is the designation for GDP growth, net of inventory change.
* Nevertheless, revised first-quarter inventory change of $21.2 billion still equaled more than 22% of the $94.5 billion total increase in GDP during the period. After excluding the change in inventories, real final sales advanced at a 2.7% annual rate during the first quarter. This was down from a 3.4% rate during last year's fourth quarter, and it was down significantly from a 5.0% rate during last year's September 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.
Real Vs. Nominal, A Continuing Whiff of "Stagflation"
* The current release showed a slight decline (-0.1%) in the GDP inflation measures, versus April's initial release. However, the numbers remained high enough -- and, on balance, continued their trend higher -- to heighten concerns about "stagflation" among a growing number of analysts. Of course, I've been warning about and predicting a coming bout of stagflation for a while now.
* According to yesterday's Commerce Department report, the implicit price deflators for GDP and for gross domestic purchases came in at respective revised rates of 3.1% and 2.9% during the first quarter, versus rates of 2.3% and 2.9% during last year's final quarter. However, despite their overall increase over the last two quarters, the GDP measures continue to report inflation at levels appearing somewhat out of touch with reality.
* At least the last two quarters' inflation rates that apply to gross domestic product have been somewhat more sensible than the 1.4% and 2.0% rates that were reported for last year's September quarter. Those results were particularly difficult (as in "impossible") to justify. But maybe not really so difficult, considering the then-approaching national election -- if you know what I mean!
Here are how the key GDP inflation measures have performed over the last nine quarters:
2003 2004 2005
---------------------- ---------------------- ----
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
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[1] 2.9% 1.1% 1.3% 1.4% 2.7% 3.2% 1.4% 2.3% 3.1%
[2] 3.9% 0.4% 1.6% 1.2% 3.4% 3.5% 2.0% 2.9% 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, understating inflation automatically overstates real growth.
The table below breaks out these relationships over the last 13 quarters. 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
------------------------------------------------
Year Q1 Q2 Q3 Q4
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2005 Nominal 6.7% -- -- --
Real 3.5% -- -- --
R/N 0.52 -- -- --
================================================
GDP Def. 3.1% -- -- --
PCE Def. 2.9% -- -- --
------------------------------------------------
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% 2.3%
PCE Def. 3.4% 3.5% 2.0% 2.9%
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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%
------------------------------------------------
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 First-Quarter Numbers
* The three-month period ended March 2005 was the 14th consecutive quarter of reported real GDP expansion.
* Comparing the preliminary (second) estimate of first-quarter numbers with the Commerce Department's final estimate of last year's fourth quarter, real GDP was up $94.5 billion or about 0.860%. Add one, then raise the result to the fourth power, and you get the rounded annual rate of change of 3.5%.
Nominal (Pre-Inflation) Comparisons
* Versus 2004's fourth quarter, 1Q2005 nominal GDP rose $196.9 billion, or at an annual rate of 6.7%. The respective numbers: 1Q2005 = $12191.7; 4Q2004 = 11994.8 billion.
* Versus 2004's first quarter, 1Q2005 nominal GDP rose $719.1 billion, or 6.3%. The respective numbers: 1Q2005 = $12191.7 billion; 1Q2004 = $11472.6 billion.
Real (After-Inflation) Comparisons
* Versus 2004's fourth quarter, 1Q2005 real GDP rose $94.5 billion, or at an annual rate of 3.5%. The respective numbers: 1Q2005 = $11088.8 billion; 4Q2004 = $10994.3 billion.
* Versus 2004's first quarter, 1Q2005 real GDP rose $391.3 billion or 3.7%. The respective numbers: 1Q2005 = $11088.8; 1Q2004 = $10697.5 billion.
* Three of the six primary GDP categories added to real growth in the "preliminary" versus "advance" 1Q2005 estimates of economic activity. In order of their dollar contribution, these were:
(1) Net exports (+$23.2 billion), by virtue of a
narrowing in the trade deficit by that amount,
(2) Residential fixed investment (housing, +$4.1
billion),
(3) Personal consumption expenditures (+$2.3 billion).
* Three primary GDP categories subtracted from growth. In order of their dollar contribution, these were:
(1) Inventory change (minus $11.8 billion),
(2) Government spending (minus $3.5 billion),
(3) Nonresidential fixed investment (capital
spending, minus $3.5 billion).
The sharp reported decline in the March trade deficit was inordinately responsible for much of yesterday's upward GDP revision. This number was missing -- therefore, estimated -- by the Commerce Department when it released its initial look at first-quarter GDP at the end of April. Commerce estimated a larger number for March than what was subsequently reported.
To illustrate the impact of this $23.2 billion downward revision in the trade deficit, it was equal to almost 119% of the $10.6 billion increase in reported GDP between the Commerce Department's first and second estimates. It also exceeded, by $600 million, the total increase in real final sales between the two reports.
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NOTE: For a historical perspective on GDP methodology, etc., see John Williams' excellent work at: John Williams' Shadow Government Statistics - "Gross Domestic Product".
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The following table breaks out in greater detail many of the numbers discussed above.
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PRELIMINARY ESTIMATE OF FIRST-QUARTER 2005
REAL GROSS DOMESTIC PRODUCT (Released
5/26 -- Billions of 2000 Chained Dollars
at Seasonally Adjusted Annual Rates)
--------------------------------------------------
1Q2005 4Q2004 Change/
Prel. Final Impact
------------------------
Real GDP 11088.8 10994.3 3.5%
Inventory Change 68.4 47.2 +$21.2
Real Final Sales 11018.8 10945.5 2.7%
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Components of GDP
-----------------
Personal Consumption 7816.5 7747.0 3.6%
Nonres. Fixed Investment* 1299.5 1288.3 3.5%
Resid. Fixed Investment 582.7 570.6 8.8%
Net Exports -640.0 -621.1 -$18.9
Government Purchases* 1953.2 1954.0 -0.2%
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Implicit Price Deflators:
Gross Domestic Product 3.1% 2.3% --
Gross Domestic Purchases 2.9% 2.9% --
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*MEMO ITEMS
-----------
Government Purchases
--------------------
Total 1953.2 1954.0 -0.2%
State & Local 1223.5 1225.1 -0.5%
Federal 729.6 728.8 0.4%
National Defense 491.1 490.7 0.3%
Nonresidential
Fixed Investment
----------------
Total 1229.5 1288.3 3.5%
Structures 240.3 242.3 -3.3%
Equipment & Software 1074.0 1059.5 5.6%
Info. Processing
Equip. & Software 628.9 599.5 21.1%
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MAJOR GDP COMPONENTS -- CHANGES BETWEEN
"PRELIMINARY" AND "ADVANCE" 1Q2005 ESTIMATES
(Billions of 2000 Chained Dollars at
Seasonally Adjusted Annual Rates)
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1Q2005 1Q2005
Prel. Advance Change
----------------------------
Real GDP 11088.8 11078.2 10.6
Inventory Change 68.4 80.2 -11.8
Real Final Sales 11018.8 10996.2 22.6
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Personal Consumption 7816.5 7814.2 2.3
Nones. Fixed Invest. 1299.5 1303.0 -3.5
Resid. Fixed Invest. 582.7 578.6 4.1
Net Exports -640.0 -663.2 23.2
Govt. Purchases 1953.2 1956.7 -3.5
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REAL GROSS DOMESTIC PRODUCT (SEASONALLY
ADJUSTED ANNUAL RATES, 2000 CHAINED DOLLARS)
--------------------------------------------
Year Q1 Q2 Q3 Q4
----------------------------------------
2005 3.5% -- -- --
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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