2Q2013 Gross Domestic Product: First (Advance) Estimate

Click image for larger version

The Bureau of Economic Analysis (BEA) estimated 2Q2013 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of +1.7 percent. At the same time, the BEA also revised the 1Q2013 growth estimate sharply lower (from the previously published 1.8 percent to 1.1 percent). Private domestic investment (PDI) and personal consumption expenditures (PCE) added to 2Q growth, in that order; net exports (NetX) dragged on growth, while government consumption expenditures (GCE) was a “wash.”

The 1Q revision was part of a comprehensive restatement of all historical GDP estimates from 1929 through 2012. In some cases the revisions resulted from better data while others were from accounting changes (e.g., the inclusion of “intellectual property” and other items). All estimates were affected by changing the "base” year for inflation adjustments from 2005 to 2009. Most notable among the revisions was 1Q2011, which -- as we had predicted would be the case as early as mid-2010, and the BEA now concedes -- was in significant contraction. 

Click image for larger version

For the 2Q2013 estimate, as the analysts at Consumer Metrics Institute (CMI) pointed out, the BEA assumed annualized net aggregate inflation of 0.70 percent. In contrast, the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) rose by 1.04 percent (June relative to March, annualized), and the price index published by the Billion Prices Project (BPP) rose at an annualized rate of 1.76 percent. As a reminder: an understatement of assumed inflation increases the reported headline number -- and in this case the BEA's relatively low deflator boosted the published headline rate. If the CPI-U had been used to convert the "nominal" GDP numbers into "real" numbers, the reported headline growth rate would have been +1.35 percent. And if the BPP index (which arguably best reflects the experiences of the American consumer) had be used as the "deflator," the economy would have grown at a much more modest +0.63% annualized rate.

Karl Denninger posted a critique of the current BEA methodology: “The revisions announced by the BEA going back to the 1920s are IMHO more than a bit troubling and amount to double-counting in many cases.  Specifically, intellectual property is now counted as "investment" when created.  The problem with doing so is that if it pays off then it is already accounted for and the goods and services that went into the R&D has already been counted as well. 

“Further, the BEA is now counting the accrual of defined benefit pensions into personal assets.  That's a pleasant fantasy when the pension is underfunded!  I see nothing [in the GDP report] noting that this is adjusted for the level of actual funding compared to requirements, which means that now assets are being effectively double-counted….”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.