3rd Qtr GDP Revised Up to 3.6%: Where’s the Beef?

Not to indiscriminately throw any cold water on the just released upward revision to 3rd quarter GDP (revised from 2.8% to 3.6% . . . hmmmmm) but before we break out the pom-poms, let’s take a harder look at the data as released by the Bureau of Economic Analysis,

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.6 percent in the third quarter of 2013 (that is, from the second quarter to the third quarter), according to the “second” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.5 percent.

Are we to blindly trust the report? That’s not how we navigate in these parts.

The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 2.8 percent. With this second estimate for the third quarter, the increase in private inventory investment was larger than previously estimated.

This buildup in inventories is simply pulling forward “growth” from future quarter’s GDP. What about real final sales, which I believe is the true indicator of our economic health?

Real final sales of domestic product — GDP less change in private inventories — increased 1.9 percent in the third quarter, compared with an increase of 2.1 percent in the second.

That is not a good sign. Let’s dig a  little deeper.

The increase in real GDP in the third quarter primarily reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), exports, nonresidential fixed investment, residential fixed investment, and state and local government spending that were partly offset by a negative contribution from federal government spending.

Ok, but what are the trends in these measures from the 2nd to 3rd quarter?

The change in real private inventories added 1.68 percentage points to the third-quarter change in real GDP, after adding 0.41
percentage point to the second-quarter change.

As indicated previously, this growth is akin to a smokescreen and will be smoothed out in coming quarters. In regard to the real meat and potatoes.

Real personal consumption expenditures increased 1.4 percent in the third quarter, compared with an increase of 1.8 percent in the
second.

Real exports of goods and services increased 3.7 percent in the third quarter, compared with an increase of 8.0 percent in the second.

Real nonresidential fixed investment increased 3.5 percent in the third quarter, compared with an increase of 4.7 percent in the second.

Real residential fixed investment increased 13.0 percent, compared with an increase of 14.2 percent.

So by all these measures, we actually see a slowing in the positive contribution to our economy. So where’s the beef, er, I mean where’s the growth? Because on top of these slowing trends, additionally we see,

Nonresidential structures increased 13.8 percent, compared with an increase of 17.6 percent. Equipment was unchanged in the third quarter; in the second quarter, equipment increased 3.3 percent.

Still looking for the beef, we witness growth in intellectual property products,

Intellectual property products increased 1.7 percent, in contrast to a decrease of 1.5 percent.

How convenient. Do you recall that this component of GDP was added to the equation just earlier this year. At that point in time, The New York Times designated the inclusion of intellectual property into the calculation of economic growth as Getting Creative with The GDP,

The big picture is this: Recalculating the treatment of all “artistic originals” that fit the bureau’s definitions would have increased the economy in 2007 by about $70 billion, or 0.5 percent. And R.& D., particularly in the field of biotechnology, would have added more than $200 billion. Combined, these two changes would have swelled G.D.P. by almost 3 percent.

How convenient. So while those of us living and working in the real world witness slowing trends by most every measure of economic growth, the creative artists generate a nice upward trend in the values associated with their intellectual properties from the 2nd to 3rd quarter.

I repeat my question, “Where’s the beef?”

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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