Summary
Yesterday's "final" estimate of second-quarter gross domestic product saw no change in the overall 3.3% growth rate that was reported in the earlier estimate, released on 8/31. There were some changes in configuration, however, which are examined here. Moreover, a somewhat detailed examination of final second-quarter data is important, since these numbers become the baseline for analyzing hurricane impact on third-quarter GDP.
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The Chronology
On 7/29, the Commerce Department's "advance" estimate of second-quarter real GDP indicated an annualized dollar value of $11.092 trillion. This represented a positive 3.4% annual rate of change versus the first quarter.
On 8/31, the Commerce Department's second or "preliminary" estimate indicated a revised real GDP annualized dollar value of $11.089 trillion. This represented a positive 3.3% annual rate of change versus the first quarter.
Yesterday's third or "final" estimate indicated a revised real GDP annualized dollar value of $11.089 trillion, also representing a positive 3.3% annual rate of change versus the first quarter.
These data do not include any influence from hurricanes Katrina and Rita.
General Observations Regarding
the Revised Second-Quarter Numbers
* The three-month period ended June 2005 was the 15th consecutive quarter of reported real GDP expansion.
* The final estimate of second-quarter real GDP versus the final estimate of first-quarter real GDP shows an increase of $89.9 billion, or about 0.817%. Add one, then raise the result to the fourth power, and you get the rounded annual rate of change of 3.3%.
Nominal (Pre-Inflation) Comparisons
* Versus 2005's first quarter, 2Q2005 nominal GDP rose $179.2 billion, or at an annual rate of 6.0%. The respective numbers: 2Q2005 = $12378.0; 1Q2005 = 12198.8 billion.
* Versus 2004's second quarter, 2Q2005 nominal GDP rose $711.9 billion, or 6.1%. The respective numbers: 2Q2005 = $12378.0 billion; 2Q2004 = $11666.1 billion.
Real (After-Inflation) Comparisons
* Versus 2005's first quarter, 2Q2005 real GDP rose $89.9 billion, or at an annual rate of 3.3%. The respective numbers: 2Q2005 = $11089.2 billion; 1Q2005 = $10999.3 billion.
* Versus 2004's second quarter, 2Q2005 real GDP rose $385.1 billion or 3.6%. The respective numbers: 2Q2005 = $11089.2; 2Q2004 = $10704.1 billion.
"Final" Versus "Preliminary" Comparisons
* Three of the six primary GDP categories added to real growth in the "final" versus "preliminary" 2Q2005 estimates of economic activity. Three subtracted from it. The net result was an increase of approximately $600 million.
The categories adding to growth in order of their dollar contribution, these were:
(1) Personal consumption expenditures (+$6.2 billion),
(2) Residential fixed investment (housing, +$1.4
billion),
(3) Nonresidential fixed investment (capital
spending, +$1.2 billion).
The three categories subtracting from growth in order of their dollar contribution were:
(1) Government spending (minus $0.9 billion),
(2) Net exports (minus $3.0 billion), by virtue of a
widening in the trade deficit by that amount),
(3) Inventory change (minus $4.3 billion).
The following table breaks out in greater detail many of the numbers discussed above.
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FINAL ESTIMATE OF SECOND-QUARTER 2005
REAL GROSS DOMESTIC PRODUCT (Released
9/29 -- Billions of 2000 Chained Dollars
at Seasonally Adjusted Annual Rates)
--------------------------------------------------
2Q2005 1Q2005 Change/
Final Final Impact
------------------------
Real GDP 11089.2 10999.3 3.3%
Inventory Change -1.7 58.2 -$59.9
Real Final Sales 11089.2 10940.3 5.6%
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Components of GDP
-----------------
Personal Consumption 7829.5 7764.9 3.4%
Nonres. Fixed Investment* 1279.0 1252.2 8.8%
Resid. Fixed Investment 599.3 584.1 10.8%
Net Exports -614.2 -645.4 +$31.2
Government Purchases* 1984.1 1971.9 2.5%
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Implicit Price Deflators:
Gross Domestic Product 2.6% 3.0% --
Gross Domestic Purchases 3.3% 2.9% --
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*MEMO ITEMS
-----------
Government Purchases
--------------------
Total 1984.1 1971.9 2.5%
State & Local 1247.8 1239.8 2.6%
Federal 736.1 731.8 2.4%
National Defense 491.7 487.3 3.7%
Nonresidential
Fixed Investment
----------------
Total 1279.0 1252.2 8.8%
Structures 252.7 251.0 2.7%
Equipment & Software 1040.9 1014.2 11.0%
Info. Processing
Equip. & Software 584.6 565.1 14.5%
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MAJOR GDP COMPONENTS -- CHANGES BETWEEN
"FINAL" AND "PRELIMINARY" 2Q2005 ESTIMATES
(Billions of 2000 Chained Dollars at
Seasonally Adjusted Annual Rates)
---------------------------------------------------
2Q2005 2Q2005
Final Prelim. Change
----------------------------
Real GDP 11089.2 11088.6 0.6
Inventory Change -1.7 2.6 -4.3
Real Final Sales 11089.2 11084.3 4.9
---------------------------------------------------
Personal Consumption 7829.5 7823.2 6.2
Nones. Fixed Invest. 1279.0 1277.8 1.2
Resid. Fixed Invest. 599.3 597.9 1.4
Net Exports -614.2 -611.2 -3.0
Govt. Purchases 1984.1 1985.0 -0.9
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REAL GROSS DOMESTIC PRODUCT (SEASONALLY
ADJUSTED ANNUAL RATES, 2000 CHAINED DOLLARS)
--------------------------------------------
Year Q1 Q2 Q3 Q4
----------------------------------------
2005 3.8% 3.3% -- --
2004 4.3% 3.5% 4.0% 3.3%
2003 1.7% 3.7% 7.2% 3.6%
2002 2.7% 2.2% 2.4% 0.2%
2001 -0.5% 1.2% -1.4% 1.6%
2000 1.0% 6.4% -0.5% 2.1%
1999 3.4% 3.4% 4.7% 7.3%
1998 4.5% 2.7% 4.7% 6.2%
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Real Vs. Nominal: The Whiff of "Stagflation" Continues
* The most recent second-quarter estimates showed increases in the primary GDP inflation measures, versus the August data -- to 2.6% from 2.5% for the overall GDP implicit price deflator, and to 3.3% from 3.2% for the implicit price deflator for personal consumption expenditures. The current numbers certainly keep in play "stagflation" concerns.
Here are how the key GDP inflation measures have performed over the last ten quarters (% change at annual rates):
2003 2004 2005
------------------- ------------------- --------
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
--------------------------------------------------
[1] 3.1 1.1 1.9 1.8 3.7 3.9 1.3 2.7 3.0 2.6
[2] 4.1 0.4 2.1 1.6 4.3 4.1 1.9 3.2 2.9 3.3
------------------------------------------------------
Implicit price deflators for:
[1]GDP; [2]gross domestic purchases.
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* On 7/29, the Commerce Department published benchmark GDP revisions from 2002 forward. Of the 13 quarters comprising the revision period, inflation as measured by the implicit price deflators for both overall GDP and for personal consumption expenditures was revised higher in 10 of them, lower in two of them, and left unchanged in one of them.
* Nothing in those benchmark revisions dispelled my warning of many months ago, to wit: At least a whiff of "stagflation" was returning to these numbers. And here, it remains important to lay out the critical difference between relatives and absolutes.
* Many on Wall Street would have you believe that stagflation is a phenomenon only present with high inflation rates, which is not accurate. Three reasons I can quickly think of might account for this distortion:
(1) Perhaps many of today's very bright but very young and inexperienced analysts simply were not taught certain relationships during their formal education process.
(2) Stagflation of the past often was accompanied by very high inflation rates. For instance, the inflation accompanying the so-called "Carter Malaise" period of the late 1970s was among the highest in the nation's history, with the reported CPI and PPI rates well into double digits.
(3) Stagflation does not denote a positive environment. Therefore, inherently, it is not something Street bulls would want to talk about. So, since reported inflation rates of the last few years have been low, if you associate stagflation with high inflation rates, you automatically have found a way either to avoid or to spin the subject.
* I suspect that number three has a good deal of merit. But as to the way the phenomenon works in practice, high inflation rates are definitely not necessary to experience stagflation. Instead, it is present when inflation becomes a relatively large and growing portion of nominal or total growth.
* Stagflationary environments simply are not healthy ones. History unambiguously shows that they create stress and distortions that are injurious to the economy in both macro and micro terms.
The following table breaks out the relationship between nominal and real gross domestic product over the last 14 quarters.
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NOMINAL AND REAL GDP AND RATIO OF REAL
TO NOMINAL (SAAR, 2000 Chained Dollars;
Incorporates Benchmark Revisions of 7/29/05)
------------------------------------------------
Year Q1 Q2 Q3 Q4
------------------------------------------------
2005 Nominal 7.0% 6.0% -- --
Real 3.8% 3.3% -- --
R/N 0.54 0.55 -- --
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2004 Nominal 8.1% 7.5% 5.3% 6.1%
Real 4.3% 3.5% 4.0% 3.3%
R/N 0.53 0.47 0.75 0.54
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2003 Nominal 4.8% 4.8% 9.3% 5.5%
Real 1.7% 3.7% 7.2% 3.6%
R/N 0.35 0.77 0.77 0.65
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2002 Nominal 4.3% 3.7% 3.9% 2.4%
Real 2.7% 2.2% 2.4% 0.2%
R/N 0.63 0.59 0.62 0.08
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