GDP 2Q (Oops)

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

Let’s have a look inside.

Caution: The 1.8 from the first quarter was revised downward to 1.1.  The market is not liking that either — and is definitely not better than expected.

PCE was up 1.8% in the second quarter, compared to 2.3% in the first quarter — that is, moving downward.  Worse, services was only up 0.9% (and is the majority of the economy) where it was claimed to be +1.5% last quarter.

The BEA claims that equipment and intellectual property were both strong in the investment area, measuring 4.1% and 3.8% respectively.  Those are good.

Export/import balance went massively bad — while exports were up 5.4% imports were up 9.5%, grossly overcoming that “improvement.”  Remember that GDP is C + I + G + (x – i), so as import balance degrades GDP is impacted negatively.

Federal government expenditures decreased 1.5%.  But those screaming about “sequester!” have a problem — the previous quarter claimed a decrease of 8.4%.  Blaming the poor showing this quarter on the sequester is thus demonstrably false.

The revisions announced by the BEA going back to the 1920s are IMHO more than a bit troubling and amount to double-counting in many cases.  Specifically, intellectual property is now counted as “investment” when created.  The problem with doing so is that if it pays off then it is already accounted for and the goods and services that went into the R&D has already been counted as well.

Further, the BEA is now counting the accrual of defined benefit pensions into personal assets.  That’s a pleasant fantasy when the pension is underfunded!  I see nothing noting that this is adjusted for the level of actual funding compared to requirements, which means that now assets are being double-counted.

But heh, it makes the numbers look better — right?

Yes it does, but the problem with these revisions will become clear in the coming years (and decades) as the secular shift toward higher rates continues and thus the former“build leverage and make more money” game turns from that to “the more leverage you have, the more and faster you lose money.”

That secular shift, incidentally, is a lock.  The impact on forward GDP will be amusing to watch in the coming years, particularly in the pension “accrual” game.

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