On the Revision of 3rd Quarter GDP from a 1.5% Growth Rate to a 2.1% Rate

As was widely expected,  the Second Estimate of our 3rd Quarter GDP from the Bureau of Economic Analysis indicated that our real output of goods and services grew at a 2.1% rate in the 2nd quarter, revised from the 1.5% growth rate reported in the advance estimate last month, as fixed investment and inventories were revised higher while exports were revised lower.  In current dollars, our third quarter GDP grew at a 3.4% annual rate, increasing from what would extrapolate to $17,913.7 billion a year in the 2nd quarter to $18,064.7 billion annually in the 3rd quarter, with the headline 2.1% annualized rate of increase in real output arrived at after a deflator of 1.3% was applied to that current dollar change to adjust for inflation..

While we cover the details below, remember that the press release for GDP reports all quarter over quarter percentage changes at an annual rate, which means that they're expressed as a change a bit over 4 times of that what actually occurred over the 3 month period, and that they only use the prefix "real" to indicate that the change has been adjusted for inflation using prices chained from 2009, and then calculate all percentage changes in this report from those artificial 2009 dollar figures, which we think would be better thought of as representing quantity indexes.  Given the misunderstanding evoked by the text of the press release, all the data that we'll use in reporting the changes here comes from the pdf for the 2nd estimate of 3rd quarter GDP, which is linked to on the sidebar of the BEA press release. Specifically, we refer to table 1, which shows the real percentage change in each of the GDP components annually and quarterly since 2012, table 2, which shows the contribution of each of the components to the GDP figures for those months and years, table 3, which shows both the current dollar value and inflation adjusted value of each of the GDP components, table 4, which shows the change in the price indexes for each of the components, and table 5, which shows the quantity indexes for each of the components, which are used to convert current dollar figures into units of output represented by chained dollar amounts.  The pdf for the 2nd quarter advance estimate, which this estimate revises, is here...

Real personal consumption expenditures (PCE), the largest component of GDP, were revised to show their growth at a 3.0% annual rate in the 3rd quarter, rather than the 3.2% growth rate reported last month.  That figure was arrived at by deflating the dollar amount of consumer spending with the PCE price index, which indicated inflation at a 1.3% annual rate in the 3rd quarter, which was revised from the 1.2% inflation rate that was applied to PCE in the first estimate.  Real consumption of durable goods grew at a 6.5% annual rate, which was revised from 6.7% in the advance report, and added 0.47 percentage points to GDP, as real output of recreational equipment and vehicles consumed rose at a 10.1% annual rate and output of all other consumer durable categories also grew.  Real consumption of nondurable goods by individuals rose at a 4.0% annual rate, revised from the 3.5% increase reported in the 1st estimate, and added 0.58 percentage points to 3rd quarter growth, as all categories of non-durable consumption also saw growth, while consumption of services rose at a 2.2% annual rate, revised from the 2.6% rate reported last month, and which added 1.00 percentage points to the final GDP tally.  An increase at a 3.7% rate in the real output of health care services led the services increase, as only real consumption of recreational services was slightly lower than it was in the second quarter.

Seasonally adjusted real gross private domestic investment contracted at a 0.3% annual rate in the 3rd quarter, revised from the 5.6% shrinkage estimate made last month, as real private fixed investment was revised from growth at a 2.9% rate to growth at a 3.4% rate, while the contraction in inventory growth was much smaller than previously estimated.  Investment in non-residential structures was revised down, however, from shrinking at rate of 4.0% to a contraction at a 7.0% growth rate, while the quarter's investment in intellectual property products was revised from growth at a 1.8% rate to contraction at a 0.8% rate, on a cutback in real R&D.  On the other hand, investment in equipment was revised to show growth at a 9.5% rate, not the 5.3% rate previously reported, and the growth rate of residential investment was also revised up, from 6.1% to 7.3% annually.  After those revisions, lower investment in non-residential structures subtracted 0.22 percentage points from the 3rd quarter's growth rate, investment in intellectual property subtracted 0.03 percentage points, while investment in equipment added 0.55 percentage points to growth, and growth in residential investment added 0.24 percentage points to 3rd quarter GDP...

Meanwhile, the growth in real private inventories were revised from the originally reported $56.8 billion in real growth to show inventory growth at an inflation adjusted $90.2 billion rate, which came after inventories had grown at an inflation adjusted $113.5 billion rate in the 2nd quarter, and hence the $23.3 billion smaller real inventory growth than in the 2nd quarter subtracted 0.59 percentage points from the 3rd quarter's growth rate, in contrast to the 1.44 percentage point subtraction from slower inventory growth reported in the advance estimate.  However, since slower growth in inventories indicates that less of the goods produced during the quarter were left "sitting on the shelf”, their decrease by $23.3 billion means real final sales of GDP were actually greater by that much, and hence real final sales of GDP grew at a 2.7% rate in the 3rd quarter, revised from 3.0%, compared to the real final sales increase at a 3.9% rate in the 2nd quarter, when the change in inventories was insignificant, and hence growth in real final sales then was the same as growth in GDP…

The increase in real exports was revised lower with this estimate while the increase in real imports was revised higher, and as a result our net trade was a subtraction from GDP rather than the addition previously reported, as exports are added to GDP because they are part of our production that was not consumed or added to investment in our country (hence not counted elsewhere), while increased imports subtract from GDP because they represent either consumption or investment that was not produced here.  Our real exports grew at a 0.9% rate rather than the 1.9% real export growth reported in the first estimate, and as a result added just 0.11 percentage points to 3rd quarter GDP growth.  Meanwhile, the real growth of our imports was revised to 2.1% from the previously reported 1.8% growth and hence imports subtracted 0.33  percentage points from the quarter's growth rate.  Thus, our deteriorating trade balance subtracted a net 0.22% percentage points from 3rd quarter GDP, after an improving trade balance had added 0.18 percentage points to 2nd quarter growth...

Finally, there were only minor revisions to real government consumption and investment in this 2nd estimate, as the real growth rate for the entire government sector was unchanged at a 1.7% rate.  Real federal government consumption and investment was seen to have grown at a 0.1% rate from the 2nd quarter in this estimate, revised from the 0.2% growth rate of the federal government previously reported.  Real federal spending for defense was revised to show it shrinking at a 1.5% rate rather than the 1.4% contraction rate previously reported, subtracting 0.06% percentage points from 3rd quarter GDP, while all other federal consumption and investment grew at a 2.6% rate, rather than the 2.8% growth rate previously reported, and added 0.7 percentage points to GDP.  Note that federal government outlays for social insurance are not included in this GDP component; rather, they are included within personal consumption expenditures only when such funds are spent on goods or services, indicating an increase in the output of those goods or services.  Meanwhile, real state and local consumption and investment was revised from growing at 2.8% rate in the first estimate to growth at a 2.6% rate in this estimate, that hence added 0.29 percentage points to 3rd quarter GDP.

In our FRED bar graph below, each color coded bar shows the real change, in billions of chained 2009 dollars, in one of the major components of GDP over each quarter since the beginning of 2012.  In each quarterly grouping of seven bars on this graph, the quarterly changes in real, or inflation adjusted, personal consumption expenditures are shown in blue, the changes in real gross private investment, including structures, equipment and intangibles, are shown in red, the quarterly change in private inventories is in yellow, the real change in imports are shown in green, the real change in exports are shown in purple, while the real change in state and local government spending and investment is shown in pink, and the real change in Federal government spending and investment is shown in grey.  Those components of GDP that contracted in a given quarter are shown below the zero line and subtract from GDP, those that are above the line grew during that quarter and added to GDP; the exception to that is imports in green, which subtract from GDP, and which are shown on this chart as a negative, so that when imports shrink, they will appear above the line as an addition to GDP, and when they increase, as they have in the recent quarter, they'll appear below the zero line.  You can clearly see that the major contribution to GDP growth in the 3rd quarter came as a result of increased real personal consumption in blue, while slower growth in inventories (yellow) and increased imports (green) were the major subtraction from 2015 Q3 growth.

3rd quarter 2015 GDP 2nd estimate

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all inventories

I recall a previous inventory chg rate (deceleration) has fairly wide revisions. TBD I guess.

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700,000 seasonal workers

Can that be right?

New York Times: "Retailers have hired an extra 700,000 seasonal workers this season, according to the National Retail Federation."
http://www.nytimes.com/2015/11/27/business/black-friday-retail-workers-t...

The Bureau of Labor Statistics reports a total 784,000 jobs created over the last 4 months.
http://data.bls.gov/timeseries/CES0000000001?output_view=net_1mth

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Seasonally Adjusted

that's what it says right under CES0000000001 on your second link...
that means the numbers are massaged to remove seasonal effects...
month to month swings of a million jubs in the unadjusted data are not uncommon...
here's a table with both listed: http://www.bls.gov/news.release/empsit.t17.htm
it will be updated with November data on Friday...
i wouldn't be surprised to see a 700,000 jump in the unadjusted payroll numbers then..

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rjs

plz don't link to New York Times

The two are not the same thing at all, seasonal are already adjusted although that large will cause an increase in comparison to past years I think. But permanent and seasonal are two separate things.

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addendum to this GDP analysis

i've just posted an evaluation of my earlier forecasts regarding this revision, titled "On Estimating the Revisions to GDP Before They're Released.  there is nothing particularly new there, but quite a bit of detail on how some of the monthly economic reports resulted in the revisions described above...

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rjs