Washington, D.C., USA: Real gross domestic product increased at an annual rate of 4.1 percent in the second quarter of 2018, according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.2 percent (revised).
The consensus estimate in a median survey of economists was for U.S. economic expansion of 4.2 percent in the second quarter.
The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency.
The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, federal government spending, and state and local government spending that were partly offset by negative contributions from private inventory investment and residential fixed investment. Imports, which are a subtraction in
the calculation of GDP, increased.
The estimates released today also reflect the results of the 15th comprehensive update of the National Income and Product Accounts (NIPAs). The updated estimates reflect previously announced improvements, and include the introduction of new not seasonally adjusted estimates for GDP, GDI, and their major components.
The acceleration in real GDP growth in the second quarter reflected accelerations in PCE and in exports, a smaller decrease in residential fixed investment, and accelerations in federal government spending and in state and local spending. These movements were partly offset by a downturn in private inventory investment and a deceleration in nonresidential fixed investment. Imports decelerated.
Current-dollar GDP increased 7.4 percent, or $361.5 billion, in the second quarter to a level of $20.4 trillion. In the first quarter, current-dollar GDP increased 4.3 percent, or $209.2 billion.
The price index for gross domestic purchases increased 2.3 percent in the second quarter, compared with an increase of 2.5 percent in the first quarter (table 4). The PCE price index increased 1.8 percent, compared with an increase of 2.5 percent. Excluding food and energy prices, the PCE price index increased 2.0 percent, compared with an increase of 2.2 percent.
Current-dollar personal income increased $183.7 billion in the second quarter, compared with an increase of $215.8 billion in the first quarter. Decelerations in wages and salaries, government social benefits, personal interest income, and nonfarm proprietors’ income were partly offset by accelerations in personal dividend income and rental income, a deceleration in contributions for government social insurance (a subtraction in the calculation of personal income), and an upturn in farm proprietors’ income.
Disposable personal income increased $167.5 billion, or 4.5 percent, in the second quarter, compared with an increase of $256.7 billion, or 7.0 percent, in the first quarter. Real disposable personal income increased 2.6 percent, compared with an increase of 4.4 percent.
Personal saving was $1,051.1 billion in the second quarter, compared with $1094.1 billion in the first quarter. The personal saving rate – personal saving as a percentage of disposable personal income – was 6.8 percent in the second quarter, compared with 7.2 percent in the first quarter.
GDP q/q primer
Current-dollar estimates are valued in the prices of the period when the transactions occurred—that is, at “market value.” Also referred to as “nominal estimates” or as “current-price estimates.”
Real values are inflation-adjusted estimates—that is, estimates that exclude the effects of price changes.
The gross domestic purchases price index measures the prices of final goods and services purchased by U.S. residents.
The personal consumption expenditure price index measures the prices paid for the goods and services purchased by, or on the behalf of, “persons.”
Profits from current production, referred to as corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj) in the NIPAs, is a measure of the net income of corporations before deducting income taxes that is consistent with the value of goods and services measured in GDP.
The IVA and CCAdj are adjustments that convert inventory withdrawals and depreciation of fixed assets reported on a tax-return, historical-cost basis to the current-cost economic measures used in the national income and product accounts. Profits for domestic industries reflect profits for all corporations located within the within the geographic borders of the United States.
The rest-of-the-world (ROW) component of profits is measured as the difference between profits received from ROW and profits paid to ROW.
Gross domestic product (GDP)
Gross domestic product (GDP) is the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production. GDP is also equal to the sum of personal consumption expenditures, gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment.
Gross domestic income (GDI)
Gross domestic income (GDI) is the sum of incomes earned and costs incurred in the production of GDP. In national economic accounting, GDP and GDI are conceptually equal. In practice, GDP and GDI differ because they are constructed using largely independent source data. Real GDI is calculated by deflating gross domestic income using the GDP price index as the deflator, and is therefore conceptually equivalent to real GDP.
Why Markets Care About GDP q/q
GDP quarterly change (GDP q/q) measures the annualized change in the inflation-adjusted value of all goods and services produced by the economy.
It is released quarterly by the Bureau of Economic Analysis of the Commerce Department about 85 days after the quarter ends
The usual effect is that is ‘Actual’ greater than ‘Forecast’, the report is considered good for the dollar and vice versa.
While this is q/q data, it’s reported in an annualized format (quarterly change x4). There are 3 versions of GDP released a month apart – Advance, Preliminary, and Final. The Advance release is the earliest and thus tends to have the most impact;
BEA releases three vintages of the current quarterly estimate for GDP: “Advance” estimates are released near the end of the first month following the end of the quarter and are based on source data that are incomplete or subject to further revision by the source agency; “second” and “third” estimates are released near the end of the second and third months, respectively, and are based on more detailed and more comprehensive data as they become available.
Gross Domestic Product (GDP) q/q is the broadest measure of economic activity and the primary gauge of the economy’s health.
Market reaction to Advance GDP
The U.S. dollar strengthened against a basket of its rivals early Friday in New York, ahead of the highly anticipated GDP report.
The GDP report could shape Fed rate hike expectations” going forward. Fed-funds futures indicate the market ascribes a 89.1% chance of a rate hike of 25 basis points at the Federal Reserve’s September meeting.
A solid pickup in U.S. economic growth during the second quarter of 2018 could send the dollar index back above 95 and beyond.
The ICE U.S. Dollar Index DXY+0.09% which measures the greenback against six major rivals, was up 0.1% higher at 94.874.
The broader WSJ Dollar Index XX:BUXX+0.1% a gauge of the buck against 16 currencies, also bounced 0.1% higher at 88.46.
The greenback already had been injected with a renewed sense of confidence yesterday’s after positive economic data boosted sentiment towards the U.S. economy and rate hike expectations.
Friday’s GDP data will likely also be a major driver for the euro EURUSD-0.16% which sold off after Thursday’s European Central Bank meeting that left investors looking for additional clarity on the central bank’s path to policy normalization disappointed.
The ECB announced in June that it would taper its asset purchases into year-end but not raise interest rates until summer 2019.
The euro continued to weaken on Friday, last fetching $1.1629 versus $1.1644 late Thursday in New York.
Today’s report again suggests that the Fed will continue to “gradually” raise short-term interest rates to prevent economic overheating. The Fed is widely expected to leave its benchmark rate unchanged at its policy meeting next week (Aug. 1) and increase it by +25 bps in September to +2.25%.
Other Economy News – U.S. Consumer Sentiment Drops Less Than Estimated In July
Consumer sentiment in the U.S. deteriorated by less than initially estimated in the month of July, the University of Michigan revealed in a report released on Friday.
The report said the consumer sentiment index for July was upwardly revised to 97.9 from the preliminary reading of 97.1. Despite the upward revision, the index was still down from 98.2 in June.
“Concerns about tariffs greatly accelerated in the July survey,” said Surveys of Consumers chief economist, Richard Curtin. “Across all households, 35% spontaneously mentioned that the tariffs would have a negative economic impact in July, up from 21% in June and 15% in May.”
He added, “Consumers who had negative concerns about the tariffs voiced a much more pessimistic economic outlook, had inflation expectations that were 0.6 percentage points higher than those who hadn’t mentioned tariffs, and were more likely to anticipate that the unemployment rate would rise during the year ahead.”
The report said the index of current economic conditions fell to 114.4 in July from 116.5 in June, while the index of consumer expectations ticked up to 87.3 from 86.3.
On the inflation front, one-year inflation expectations edged down to 2.9 percent in July from 3.0 percent in June and five-year inflation expectations dipped to 2.4 percent from 2.6 percent.