2Q2014 Gross Domestic Product: Third (Final) Estimate

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According to the Bureau of Economic Analysis' (BEA) “final” estimate, 2Q2014 growth in real U.S. gross domestic product (GDP) expanded at a seasonally adjusted and annualized rate of 4.6 percent. The revised 2Q rate of expansion is 0.6 percentage point greater than the initial (“advance”) estimate, and 6.7 percentage points above 1Q’s -2.1 percent contraction. This is the best positive quarter-to-quarter improvement in GDP growth since 2Q2000, and the second best since the 2Q1982. Three of the four categories -- personal consumption expenditures (PCE), private domestic investment (PDI), and government consumption expenditures (GCE) -- contributed to 2Q growth; net exports (NetX) subtracted from growth.

The positive revisions to 2Q's growth contributions were in:

• Commercial fixed investments (+0.20 percentage point relative to the previous or “preliminary” 2Q estimate);
• Exports (+0.12 percentage point);
• Consumer expenditures (+0.05 percentage point);
• Governmental expenditures (+0.04 percentage point); and
• Inventories (+0.03 percentage point).

The only downward revision was to imports (-0.03 percentage point).

Growth in real final sales of domestic product, the BEA’s “bottom line” indicator of economic health (which excludes the ever-volatile inventories) improved by about a half percentage point, to +3.17 percent.

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For this report the BEA assumed annualized net aggregate inflation of 2.15 percent. By comparison, the growth rate of the Bureau of Labor Statistics’ concurrent seasonally adjusted CPI-U index was 3.53 percent (annualized); meanwhile, the price index reported by the Billion Prices Project (BPP) was 2.72 percent. Were the BEA’s nominal estimates corrected for inflation using the CPI-U, 2Q real GDP would have grown by 3.3 percent; if using the BPP inflation rate, growth would have been 4.1 percent.

Taken at “face value,” this report strengthens the Federal Reserve’s hand for completing its quantitative easing “taper” in October. We caution against a face-value reading, though, for the following reasons:

• Consumer spending reportedly provided a little more than one-third of the headline growth; but, real per-capita disposable income has grown by only 2 percent in aggregate since 2008 (or just 0.37 percent per year). Other BEA reports show household spending remains constrained; moreover, the current savings rate suggests most consumers continue to be skeptical about the veracity and sustainability of this recovery.
• Inventories tend to be “mean reverting.” I.e., 2Q’s inventory growth was essentially the flip side of 1Q’s contraction in what is (over the long haul) a largely zero-sum outcome.
• Surging exports fly in the face of both softening economic growth among major U.S. trading partners and a strengthening dollar. Exports are likely to take a substantial hit when trade adjusts to the latest exchange rate.

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.