Second-quarter GDP growth jumped to 2.5% on second consideration

posted at 2:01 pm on August 29, 2013 by Steve Eggleston

Last month, the Bureau of Economic Analysis released the advance estimate of the gross domestic product for the second quarter of 2013 as well as the 14th comprehensive revision of the prior estimates of GDP going all the way back to 1929. The comprehensive revision is a rather remarkable story, but with the fresh release of second of three revisions, that will have to wait just a bit.

Back then, the BEA estimated the annualized, seasonally-adjusted GDP growth for the second quarter at +1.7%. The second of three scheduled estimates came in at a +2.5% annualized growth:

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 2.5 percent in the second quarter of 2013 (that is, from the first quarter to the second quarter), according to the “second” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 1.1 percent.

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 1.7 percent. With this second estimate for the second quarter, the increase in exports was larger than previously estimated, and the increase in imports was smaller than previously estimated.

The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, nonresidential fixed investment, and residential fixed investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP in the second quarter primarily reflected upturns in exports and in nonresidential fixed investment and a smaller decrease in federal government spending that were partly offset by an acceleration in imports and decelerations in private inventory investment and in PCE.

The economic experts were anticipating an increase to 2.2% on the strength of June exports. Reuters was mostly enthused by this better-than-expected good news:

The U.S. economy accelerated more quickly than expected in the second quarter thanks to a surge in exports, bolstering the case for the Federal Reserve to wind down a major economic stimulus program.

Gross domestic product grew at a 2.5 percent annual rate, according to revised estimates for the period that were released by the Commerce Department on Thursday. The quarter’s growth rate was more than double the pace clocked in the prior three months.

The report could boost confidence that the economy is turning a corner despite government austerity measures. At the same time, a full recovery from the 2007-09 recession is probably years away as the U.S. jobless rate remains historically high at 7.4 percent.

Reuters noted that investments in housing accounted for about a fifth of that GDP growth, but cautioned that higher interest rates caused by fear that the Federal Reserve would begin to slow down its bond-buying program could reverse that trend in a hurry. They did, however, miss the fact that the change in private inventories also accounted for a fifth of that GDP growth.

Highlights of the comprehensive revisions:

To honor the addition of the costs of producing movies and various other literary and artistic works, as well as the amount spent on research and development, on the positive side of GDP, here are “The Good, the Bad, and the Ugly” highlights (or lowlights as the case may be) from the comprehensive revisions:

The Good: The nominal (current-dollar) estimate of GDP in the first quarter of 2013 jumped from $15.984 trillion to $16.535 trillion based on the comprehensive revisions.

The Bad: Several of the previous quarters saw rather radical decreases in the increase in real (constant-dollar, now benchmarked to 2009 instead of 2005) GDP:

  • First quarter 2013 real GDP growth shrank from +1.8% to +1.1%.
  • Fourth quarter 2012 real GDP growth shrank from +0.4% to +0.1%.
  • Second quarter 2012 real GDP growth turned into real GDP shrinkage, as it went from +0.1% to -1.3%.

The Ugly: Taxing the “rich” is even more destructive than previously thought. Tom Blumer put together a chart comparing the first 4 years of the Reagan recovery from the 1981/1982 recession to the first 4 years of the Obama “recovery” from the Great Recession (using last month’s preliminary read of the 2Q2013 GDP), and it’s not pretty.

Related to that, The Wall Street Journal took a more-expansive look at the comprehensive revision:

We also learn from the revisions that the stagflationary 1970s—in particular the Nixon years—generated even less growth than originally recorded. This was an era of the 70% top marginal tax rate made worse by inflation that hit 13% and a huge expansion of the welfare and regulatory state.

By contrast, growth in the 1980s was even faster than we thought, averaging 4.4% a year from 1983-1989. This was the era by and large of tax cuts, deregulation, disinflation and government spending restraint. The recession of 1990, portrayed as a catastrophe at the time, turns out to have been minuscule, as the Reagan boom flowed into the prosperity of the 1990s. The Clinton tax increase of 1993 slowed growth from the robust recovery of late 1992 (3.6% for the year), but the Clinton-Gingrich policy mix and stalemate let the private information economy expand.

… the economy grew faster in the five years following the 2003 investment tax cut than previously measured. The five-year average was 3%, and over 2004-2005 growth averaged a robust 3.6%. The housing bust and financial panic ruined what was otherwise an economy growing at close to post-1929 norms.

The “Intellectual Property” factor:

The biggest boost in nominal GDP through the comprehensive revisions came from the BEA recognizing the expenditures in research and development and in most forms of original artistic works as fixed investment. Specifically with respect to the $559.8 billion increase in 2012 annual nominal GDP, R&D provided $396.7 billion (including $269.1 billion in privately-funded R&D) of that increase, while artistic works provided $74.3 billion of that increase.

The BEA describes why it is now considering R&D spending as investment in its FAQ on the change, “R&D has long been recognized as having the distinguishing features of fixed assets: it is a produced asset using labor and capital resources; it has defined ownership rights; it is used repeatedly in the production process; and it has a useful life of more than one year.” The BEA further went on to explain that research that leads to nothing is functionally no different than drilling an unsuccessful oil well or purchasing equipment that is faulty or prematurely scrapped.

As for the inclusion of artistic originals that are mass-produced, at first blush it does seem nothing more than a gift to Hollywood. Upon further reflection, the production of an artistic original is equivalent to a sprocket manufacturer buying a new die to mass-produce a new sprocket.

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Couldn’t help it, great one.

Schadenfreude on August 29, 2013 at 2:07 PM

“Damn you, blondie!”

oldroy on August 29, 2013 at 2:15 PM

Taken with many grains of salt given this Administration’s history of ‘cooking the books’ to fit a political message.

First quarter 2013 real GDP growth shrank from +1.8% to +1.1%.
Fourth quarter 2012 real GDP growth shrank from +0.4% to +0.1%.
Second quarter 2012 real GDP growth turned into real GDP shrinkage, as it went from +0.1% to -1.3%.

So many revisions and changes (corrections) to past numbers – none of which garner very much attention this long after the fact.

Another interesting note – The Labor Participation Rate has hit a 34 year low - Not since 1979 and the Carter malaise have we had a labor participation rate this low.

The chart linked above by Tom Blumer is very enlightening…

The free market system is quite resilient and if left alone self-corrects. This Administration is not only not leaving it alone, it’s attacking it in the name of an ideological agenda.

Athos on August 29, 2013 at 2:15 PM

Spaghetti economics?

oldroy on August 29, 2013 at 2:15 PM

It would be interesting if we could see a list of ALL revisions to the GDP by year(s) and make comparisons. Not sure if such a thing exists, but it would be fun to see if the predictions and first reports are consistently wrong either plus or minus.

Johnnyreb on August 29, 2013 at 2:16 PM

Couldn’t help it, great one.

Schadenfreude on August 29, 2013 at 2:07 PM

..this is a neater version:

http://www.youtube.com/watch?v=pLgJ7pk0X-s

The War Planner on August 29, 2013 at 2:18 PM

Not too surprising here. The manufacturing sector is one area where you get to see most of the effects of policy almost immediately. What I am surprised at, is the BEA ‘fessing up over what is good vs. what is bad policy.

As of now, there will be no full-time hiring to add to existing payrolls. Because of the HHS mandates, my company will not EVER go beyond the 49 employee limit. Simply put: It’s too expensive.

Our orders HAVE picked-up, and our suppliers have been able to meet demand. We implemented a new E.R.P. system and chose very wisely, and are now seeing improvements in overall efficiency that can also be attributed to implementing the leanest form of manufacturing our industry can tolerate.

Bottom line: We are seeing an increase in business, but there will be no growth once we hit our efficiency wall due to current regulatory practices. As it stands, the costs are still too high and the risks too great to hire additional full-time employees.

Turtle317 on August 29, 2013 at 2:24 PM

“comprehensive” I’m suspicious already.

forest on August 29, 2013 at 2:27 PM

Nice to see one of us contributing. That said I’d like to believe this but I can’t trust any numbers coming out of Obama’s administration no matter who reports it.

DanMan on August 29, 2013 at 2:28 PM

Athos on August 29, 2013 at 2:15 PM

Here is something close to reality courtesy the Consumer Metrics institute: (scroll down for the report)

http://www.consumerindexes.com/

For this set of revisions the BEA assumed annualized net aggregate inflation of 0.71%. In contrast, during the first quarter (i.e., from December to March) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) rose by 1.04% (annualized), and the price index published by the Billion Prices Project (BPP) rose at an annualized rate of 1.76%. As a reminder: an understatement of assumed inflation increases the reported headline number — and in this case the BEA’s relatively low “deflater” 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 a somewhat lower +2.20%. And if the BPP index (which arguably best reflects the experiences of the American consumer) had be used as the “deflater,” the economy would have been a more modest +1.48% annualized rate.

Emphasis mine. In other words, they lie.

And have you been following the JOLT numbers?

dogsoldier on August 29, 2013 at 2:28 PM

“intellectual property?” Is that Hot Air?

Oil Can on August 29, 2013 at 2:29 PM

However job growth is being revised downward.

pat on August 29, 2013 at 2:29 PM

We know that 2.5 will be revised down

cmsinaz on August 29, 2013 at 2:30 PM

First quarter 2013 real GDP growth shrank from +1.8% to +1.1%.
Fourth quarter 2012 real GDP growth shrank from +0.4% to +0.1%.
Second quarter 2012 real GDP growth turned into real GDP shrinkage, as it went from +0.1% to -1.3%.

The years and quarters are fluid…the rest is static.

Same with unemployment…err..well, they just include fewer people each time so no…

BigWyo on August 29, 2013 at 2:32 PM

Athos on August 29, 2013 at 2:15 PM

Jeeze..I should RTFT before I post….

gah…

BigWyo on August 29, 2013 at 2:33 PM

And just so I have all bases covered…

Racist!!!

BigWyo on August 29, 2013 at 2:36 PM

Dang it Steve! This is a tough one. Reading it again.

Bmore on August 29, 2013 at 2:40 PM

Nothing being put out is believable anymore; that’s where we are.

Midas on August 29, 2013 at 2:45 PM

At what point does “tax the rich” mean tax anyone with an income? And then tax them until they qualify for government “entitlements” and become a ward of the state.

KCsecurity1976 on August 29, 2013 at 2:49 PM

My head hurts! Dang it Steve, reading it yet again.

Bmore on August 29, 2013 at 2:51 PM

… the economy grew faster in the five years following the 2003 investment tax cut than previously measured. The five-year average was 3%, and over 2004-2005 growth averaged a robust 3.6%. The housing bust and financial panic ruined what was otherwise an economy growing at close to post-1929 norms.

On the surface, this seems a bit disingenuous. I don’t know if the article addresses it, but a large amount of that “robust” growth was due to the irrational activities in the housing market, which lead to the subsequent ruinous bust and panic.

I’d have much rather seen, in retrospect, a much more modest growth (of, say, 2-2.5%) over those years, if it had meant that the banks had behaved rationally. We would not have seen the massive financial panic of ’08, and all of the fallout with which we are still dealing.

But we are basically looking at the destruction of the country, due to the idiot bankers and their partners in Washington. The repercussions seem to be never-ending, and have lead to the moochers leaching the rest of us dry.

nukemhill on August 29, 2013 at 2:53 PM

The missing key is in the last paragraph. They have changed the way GDP is figured. When the changes were announced, some analysts figured it could add up to a full point to GDP. So a revision of +0.8% is well within the range.

In some respects, the changes make sense because R&D and intellectual property do contribute to the economy. The problem is we are the only nation in the world making the change, and for GDP to be a useful measure it not only needs to be compared to previous years but also to other major economies.

Obama has ensured “higher growth” and the appearance of outpacing growth in other industrialized countries with a rule change. What, you expected his policies to help?

Adjoran on August 29, 2013 at 3:03 PM

Okay, I’m going with Turtle on this one. ; )

Bottom line: We are seeing an increase in business, but there will be no growth once we hit our efficiency wall due to current regulatory practices. As it stands, the costs are still too high and the risks too great to hire additional full-time employees.

Turtle317 on August 29, 2013 at 2:24 PM

Man that was a lot of head hurt to get there.

Bmore on August 29, 2013 at 3:05 PM

And have you been following the JOLT numbers?

dogsoldier on August 29, 2013 at 2:28 PM

Yeah, I glance at the reports when released – noticing the trend showing that the number of openings are increasing and total hiring is declining – particularly in the May 2013 report released earlier this month.

Not a good trend as hiring is at its lowest level than the year before – and that May report had the largest number of job openings since May 2008.

Tells us that employers remain as, if not more, reluctant to hire because of uncertainties related to taxes, ACA, and pessimism in this really being as robust recovery as the lamestream media is trying to tell us it is.

Athos on August 29, 2013 at 3:07 PM

I for one think it’s wonderful how the choco ration’s gone up beyond previous expectations. What’s wrong with you people? Big Brother is obviously delivering even more than we can expect!…or deserve.

I love Munificent All-Merciful Big Brother. He sends thrills up my legs.

Dr. ZhivBlago on August 29, 2013 at 3:17 PM

But what about the chocolate ration?

claudius on August 29, 2013 at 3:31 PM

Athos on August 29, 2013 at 3:07 PM

Also they are holding off due to the Amnesty bill. A flood of H1 and H2 workers looks very nice to employers.

dogsoldier on August 29, 2013 at 3:43 PM

It would be interesting if we could see a list of ALL revisions to the GDP by year(s) and make comparisons. Not sure if such a thing exists, but it would be fun to see if the predictions and first reports are consistently wrong either plus or minus.

Johnnyreb on August 29, 2013 at 2:16 PM

I don’t think that exists (just too much data), but if memory serves, the second revision recently has been the most volatile in both directions because the advance look has so much estimation involved.

If anybody in blogging knows for sure on the recent side, it would be Tom Blumer.

Steve Eggleston on August 29, 2013 at 5:48 PM

We know that 2.5 will be revised down

cmsinaz on August 29, 2013 at 2:30 PM

Most likely.

Steve Eggleston on August 29, 2013 at 5:49 PM

dogsoldier on August 29, 2013 at 2:28 PM

I was hoping someone would catch the abnormally-low price deflator (BEA’s estimate of chained inflation). This was already a long post without throwing it in.

The CPI series really is applicable only to the perconal consumptions portion of GDP. Still, the PPI (slightly lower than CCPI-W), which would apply to the business side of GDP, doesn’t support a 0.7% deflator, much less the combo of CCPI-W or PPI.

Steve Eggleston on August 29, 2013 at 6:01 PM

“intellectual property?” Is that Hot Air?

Oil Can on August 29, 2013 at 2:29 PM

The software portion is, though that is a reclassification of software.

Steve Eggleston on August 29, 2013 at 6:03 PM

Spaghetti economics?

oldroy on August 29, 2013 at 2:15 PM

More like Back-And-Forth Economics, as in “One step forward, two steps back. Two steps forward, one step back.”

2.5% growth is at the boundary between stagnation and minimal healthy growth. Given that the average annualized growth since the official end of the Great Recession has been well south of actual recovery, and the previous 3 quarters were under that, I’d say stagnation.

Steve Eggleston on August 29, 2013 at 6:09 PM

My head hurts! Dang it Steve, reading it yet again.

Bmore on August 29, 2013 at 2:51 PM

Sorry about that. You should have seen the source material I had to go through :-)

Steve Eggleston on August 29, 2013 at 6:38 PM

If we calculated CPI the way we did in the early 90s, it would be running double digits.

You can’t get a good consistent measure if you keep changing the length of your ruler.

Peter Schiff lays out the fudging:

http://www.mrctv.org/videos/peter-schiff-gdp-numbers-fudged

Laurence on August 29, 2013 at 7:49 PM

Sorry about that. You should have seen the source material I had to go through :-)

Steve Eggleston on August 29, 2013 at 6:38 PM

Ya think?!?! Lolz! My head still hurts.

Bmore on August 29, 2013 at 8:08 PM

The U.S. economy accelerated more quickly than expected in the second quarter thanks to a surge in exports, bolstering the case for the Federal Reserve to wind down a major economic stimulus program.

Had to read that bit twice myself. :) But then I remembered my idea of stimulus and, say, Biden’s idea of stimulus — two different stimuli. So they are talking about the electrons they’ve been pumping through 64-bit wide gates.

As for the inclusion of artistic originals that are mass-produced, at first blush it does seem nothing more than a gift to Hollywood. Upon further reflection, the production of an artistic original is equivalent to a sprocket manufacturer buying a new die to mass-produce a new sprocket.

I’d love to comment on the whole BEA thing, but I’m waiting until my head isn’t tilted when I look at it. :) Even on further reflection, that first blush doesn’t go away. Necessary to pick an attitude.

Axe on August 29, 2013 at 9:33 PM

Ideally, to document the role R&D plays within the economy, BEA would measure the market value of R&D created. In most cases, however, observed market transactions and dollar values for this output do not exist. Conceptually, the value of R&D is equal to the present value of the future stream of benefits derived from R&D spending. In practice, because future benefits are not observable, and most R&D assets are produced on own-account, BEA measures R&D activity as the sum of its production or input costs. BEA currently also uses this approach for other nonmarket components of GDP.

http://www.bea.gov/faq/index.cfm?faq_id=1028

So this spending is product now, the measurement of the spending itself . . .

See, that spending seems a lot more like regular “cost of doing business” than obtaining a fixed asset. They talk about the value of the R&D product as being the same as any other produced asset, but then they turn around and value it at manufacturing cost. That means I could go into my backyard, bank loan for a $1,000,000 in tow, and pile dirt using a shovel I rented at $100,000 an hour — and the value of my sand castle, for GDP purposes, would be +$1,000,000.

. . . Might not be getting it.

Axe on August 29, 2013 at 9:52 PM

Had to read that bit twice myself. :) But then I remembered my idea of stimulus and, say, Biden’s idea of stimulus — two different stimuli. So they are talking about the electrons they’ve been pumping through 64-bit wide gates….

Axe on August 29, 2013 at 9:33 PM

The stimulus Reuters was talking about was QE-Forever, the $40 billion/month bond purchase (I believe currently mortgage-based bonds) by the Federal Reserve. They’ve been talking rather loudly about slowing that down once they’re convinced the economy isn’t completely tanking, with September as the target month. That means the August jobs report will be “disappointing” to keep that gushing woun…er…program going.

(continuing)I’d love to comment on the whole BEA thing, but I’m waiting until my head isn’t tilted when I look at it. :) Even on further reflection, that first blush doesn’t go away. Necessary to pick an attitude.

Personally, I wouldn’t count either that new sproket die or the money blown on the latest Hollywood blockbuster as “investment”, but since the BLS has long counted the die as “investment”, it is somewhat “honest” to count the budget of said blockbuster as “investment”.

Steve Eggleston on August 29, 2013 at 9:54 PM

So this spending is product now, the measurement of the spending itself . . .

See, that spending seems a lot more like regular “cost of doing business” than obtaining a fixed asset. They talk about the value of the R&D product as being the same as any other produced asset, but then they turn around and value it at manufacturing cost. That means I could go into my backyard, bank loan for a $1,000,000 in tow, and pile dirt using a shovel I rented at $100,000 an hour — and the value of my sand castle, for GDP purposes, would be +$1,000,000.

. . . Might not be getting it.

Axe on August 29, 2013 at 9:52 PM

That’s always been the problem with trying to value a “service”, whether it’s R&D or a haircut. As for the sand castle, that’s a “tangible” asset and would have been valued at $1 million under every recent measurement of GDP.

Where’s King Bainian when I need him?

Steve Eggleston on August 29, 2013 at 10:01 PM

As for the sand castle, that’s a “tangible” asset and would have been valued at $1 million under every recent measurement of GDP.

Where’s King Bainian when I need him?

Steve Eggleston on August 29, 2013 at 10:01 PM

My head still hurts.

Bmore on August 29, 2013 at 8:08 PM

bum an aspirin?

Axe on August 29, 2013 at 10:10 PM

Axe on August 29, 2013 at 10:10 PM

Yeah, you probably just skimmed it and nailed it. Me I was just not getting the numbers today at all. Not that I’m great at em anyhow. I’m okay with the simple stuff. Just not a numbers guy I guess. ; )

Bmore on August 29, 2013 at 10:24 PM

Yeah, you probably just skimmed it and nailed it. Me I was just not getting the numbers today at all. Not that I’m great at em anyhow. I’m okay with the simple stuff. Just not a numbers guy I guess. ; )

Bmore on August 29, 2013 at 10:24 PM

be careful what you wish for

–Sophie Ro

Axe on August 29, 2013 at 10:34 PM

Axe on August 29, 2013 at 10:34 PM

You are my first outside link. Is that the way you want it to look?

Bmore on August 29, 2013 at 10:44 PM

bum an aspirin?

Axe on August 29, 2013 at 10:10 PM

Preferably a caffeine-laced Bayer.

Steve Eggleston on August 30, 2013 at 7:42 AM