Washington, D.C., USA: Real gross domestic product (GDP) increased 3.5 percent (vs 3.6% Expected) in the third quarter of 2018, according to the “second” estimate released by the Bureau of Economic Analysis. The growth rate was unrevised from the “advance” estimate released in October. In the second quarter, real GDP increased 4.2 percent.
The U.S. economy remained on a solid footing in the third quarter, matching previously reported results, as stronger business investment and a bigger boost from inventories cushioned the worst trade drag since 1984.
The biggest change from the prior report on GDP, the value of all goods and services produced in the nation, came from stronger business investment, while most other categories were in line with earlier readings.
Nonresidential fixed investment — which includes spending on equipment, structures and intellectual property – grew 2.5 percent, revised from a 0.8 percent gain. Economists are monitoring such spending because, along with consumer purchases, it was a main driver of growth in the first half.
Combined with a 4.2 percent pace of GDP growth in the April to June period, the results capped the best back-to-back quarters since 2014. At the same time, growth is projected to moderate this quarter.
Risks to the outlook include an escalating trade war with China, cooling global demand and rising borrowing costs, while the boost from President Donald Trump’s tax cuts is expected to wane next year.
The report also provided a first glimpse of some key data: Corporate pretax earnings rose 10.3 percent from a year earlier, the most in six years, after a 7.3 percent advance. Gross domestic income rose 4 percent, the most since 2014.
Equipment spending was revised up to a 3.5 percent rise from a 0.4 percent gain, while investment in structures showed a 1.7 percent drop compared with a previously reported decline of 7.9 percent.
Net exports subtracted 1.91 percentage point from growth, while inventories added provided a 2.27 point boost.
Stripping out the volatile components of trade and inventories, so-called final sales to domestic purchasers climbed at an unrevised 3.1 percent pace.
Housing still posted a third consecutive drag on GDP growth and reaffirmed that the industry has entered a broad slowdown. Residential investment fell 2.6 percent, compared with an initially reported contraction of 4 percent.
Inflation rose an unrevised 1.7 percent. The Federal Reserve’s goal is 2 percent based on its preferred gauge tracking personal consumption expenditures. Excluding food and energy, the Fed’s preferred price index advanced 1.5 percent, revised from 1.6 percent.
Government spending increased at a 2.6 percent rate, revised from 3.3 percent. That added 0.44 point to growth.
GDP report is the second of three estimates for the quarter; the third is due in December as more data become available.
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.