The Bureau of Economic Analysis released their advance estimate of second-quarter GDP and said that real GDP grew by an annualized 2.3% over the first quarter. The bigger news is that release also incorporated revisions to GDP estimates from the first quarter of 2012 through the first quarter of 2015, as the BEA began to implement what Steve Liesman of CNBC calls “residual seasonality” and what many call double seasonal adjustment.
In the first quarter of 2014, the government sent shivers through global financial markets by reporting a recession-like contraction in the U.S. economy of 2.1 percent. Despite severe winter storms and record-breaking cold, economists still could not account for the deep plunge in growth. Even Federal Reserve officials worried something worse than just the effects of bad weather could be amiss in the economy.
Turns out, it was the data itself and how the government calculates gross domestic product that were actually amiss. The Bureau of Economic Analysis, the federal agency responsible for GDP, now says growth was actually 1.2 percentage points higher in the quarter for a more manageable and understandable decline of 0.9 percent.
The bureau announced Thursday its regular annual revisions of the past three years and confirmed a series of stories in CNBC that raised questions about the seasonal pattern of growth. Overall, the government revised down GDP over the three years ending in 2014 by a modest 0.3 percent but also took the first steps in changing the way it calculates GDP to account for anomalies in the quarterly pattern of growth….
In its report, the bureau revealed a new problem that CNBC had not found: Overstatement of growth in the third quarter for at least the past three years. In fact, the biggest change over the three-year period was a 2 percentage point downward revision to the third quarter of 2012 to show just a half-point of growth, and a 1.5 percentage point downward adjustment to the third quarter of 2013 to show 3 percent growth. In both quarters, the biggest subtraction came from lower federal defense spending.
A note to Liesman and his colleagues at CNBC – when one merely shifts growth around, it has to come from somewhere. Other estimates of the effects of double seasonal adjustment, that assumed a mere shift of economic activity, strongly suggested reductions in the growth in other quarters, especially the third, would happen.
Tom Blumer over at BizzyBlog put together a chart of the revisions, both quarterly and full-year (really, an average of the 4 quarterly estimates):
Courtesy BizzyBlog/Tom Blumer, reposted with permission
At the end of this round of adjustments, the nominal GDP of $17,649.3 billion as of the 1st quarter of 2015 was $44.0 billion lower than the 3rd estimate released last month, while real GDP of $16,177.3 billion (2009 dollars) was $110.4 billion (2009 dollars) lower than previously reported. The BEA’s implicit price deflator, its measure of inflation, appears to have increased by an average of roughly 0.1 percentage point over the last 3 years, putting it slightly closer in line with, but still significantly lower than, the Consumer and Producer Price Indexes.
Moving on to the current report, personal consumption expenditures contributed +1.99 percentage points to the change in real GDP. Once again, the biggest component of that was spending on health care, with a +0.31-point contribution. However, that is the first time in 5 quarters that spending on health care contributed less than +0.52 percentage points (on a revised basis).
Spending on goods also picked up, with durable goods spending contributing +0.53 percentage points (the largest contributor was auto sales/auto parts at +0.26 points) and nondurable goods spending contributing +0.52 percentage points (the largest contributor was “other nondurable goods” at +0.27 points). That spending increase is on top of a 1.4% increase in the price index for all gross domestic purchases (versus a 1.6% decrease in the first quarter), and a 1.1% increase in the price index for non-food/non-energy gross domestic purchases (versus a 0.2% increase in the first quarter).
That did not come at the expense of net exports, as that contributed a rare positive change, +0.13 percentage points this time around.
Business investment contributed far less to GDP change than in recent history, with fixed investment’s contribution of +0.14 percentage points the lowest since the 3rd quarter of 2012. The change in private inventories, after contributing +0.87 percentage points (+0.77 points nonfarm) in the first quarter, contributed -0.08 percentage points (-0.06 points nonfarm) in the 2nd quarter.