FLASH UPDATE - December 23, 2008

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

December 23, 2008

__________

"Final" 3rd-Quarter GDP Estimate Showed Higher Inflation

Big Contraction in Nominal 4th-Quarter GDP?

__________

PLEASE NOTE: The full SGS newsletter now is targeted for next Tuesday (December 30th) and will include an update to the unfolding picture for the broad money supply in the context of the latest weekly reporting.  
– Best Wishes for the Most Joyous of Holiday Seasons and for a Happy, Healthy and Prosperous New Year!   John Williams and the ShadowStats.com team

Inflation-Adjusted GDP Was Unchanged, But Other Numbers Shifted. Matching market expectations in troubled financial times, the Bureau of Economic Analysis’s (BEA) "final" estimate revision (it gets revised again in July 2009) of real (inflation-adjusted) annualized growth in the third-quarter GDP was a statistically insignificant contraction of 0.51% +/- 3% (95% confidence interval), unchanged from the "preliminary" estimate. That calculation, however, reflected a combination of an upward revision to nominal (not adjusted for inflation) annualized growth of 3.57%, from a preliminary 3.35%, and an offsetting upwards revision to GDP inflation (implicit price deflator) to 4.11% from a preliminary 3.88%.

The third quarter’s contraction of 0.51% was against a second quarter growth rate of 2.83%. In terms of year-to-year change, the third quarter’s annual growth revised to 0.75% (previously 0.74%), against second quarter annual growth of 2.05%.   The SGS-Alternate GDP estimate remains an annual contraction of roughly 3.3% versus an annual (not annualized) contraction of 2.9% in the second quarter. Against reporting of underlying economic series, an annualized quarterly contraction in excess of 2% for the third quarter would have been more realistic than the 0.51% estimate.

The BEA’s GDP-like measures for third-quarter 2008 also were revised in the latest reporting: Gross National Product (GNP), where GDP is GNP net of trade in factor income (interest and dividend payments); and Gross Domestic Income (GDI), which is the theoretical income-side equivalent to the GDP’s consumption-side measure.

GNP. Third-quarter GNP contracted at an annualized rate of 0.17% (previously 0.43%), versus a 2.10% gain in the second quarter. Year-to-year change was 0.83% (previously 0.77%) in the third-quarter, versus 2.43%, in the second.

GDI. Third-quarter GNP contracted at an annualized rate of 0.57% (previously 0.56%), versus a 0.46% gain in the second quarter, but the current contraction was the third quarterly contraction in the last four quarters. Year-to-year change was a contraction of 0.45% (previously 0.43%) in the third quarter, following a 0.30% annual gain in the second.

4th-Quarter GDP. Looking forward to the "advance" estimate of fourth-quarter GDP on January 30, 2009 — the first estimate due to be published by the incoming Obama Administration (the bulk of the data will be prepared under the Bush Administration) — some forecasts being floated in the markets are for a 5% annualized contraction. Such is not an unreasonable number and even might be desirable as a political tool in helping to sell the promised massive stimulus package. Less-negative numbers then would tend to be reported in the post-stimulus period. In order to get a real 5% annualized contraction in the current quarter, though, nominal growth likely would have to turn negative as well, a characteristic of only the deepest historical downturns.

Given the recent collapse in energy prices, the fourth-quarter GDP implicit price deflator’s inflation rate should be lower than the 4.11% used in the third quarter. (GDP inflation subtracted from nominal GDP growth yields real GDP growth.)   Since the importation of lower priced oil in the fourth-quarter should work as an inflation booster (imports are get subtracted from economic activity, which reverses the inflation impact in the GDP), offsetting some of the impact of lower prices of consumed gasoline, etc., the pace of slowing GDP inflation should not be quite as severe as seen in the CPI. Even so, nominal GDP growth could see its sharpest annualized decline since the Eisenhower Administration.   

More complete detail on current economic and inflation conditions will follow in next week’s full SGS Newsletter.

__________