Thoughts Ahead Of Wednesday's Advance Estimate Of Q2 GDP

by: Doug Short

By Doug Short

The big economic announcement Wednesday will be the Advance Estimate of Q2 GDP. Recall that the Advance Estimate of 0.1% for Q1 GDP underwent two downward revisions: -1.0% in the first revision and -2.9% in the second revision. Mainstream economists have been generally optimistic that the contraction in Q1 GDP was attributable to an unusually severe winter and that Q2 would show a significant bounce. The estimate is for 3.0%. has a consensus of 3.2%, and its own forecast is for an even stronger 3.7%.

The July Wall Street Journal survey of economists also sees a major Q2 rebound in GDP. The mean (average) survey response was 3.1%, and the median and mode (middle and most frequent number) came in at 3.0%. As a chart of the 48 survey responses illustrates, there were some outliers at both ends.

To clarify: The conventional expression of quarterly GDP is the compounded annual rate of change of the real (inflation-adjusted) quarterly value. In other words, it's what the growth rate would be over an entire year if the same simple percent change continued for four quarters.

For some historical context, consider a couple of facts: The 10-year GDP moving average is 1.6 percent. Its average since the end of the last recession is 2.1 percent.

Real Final Sales: Some Economic Suspense

A metric that will be particularly interesting is the Q2 Advance Estimate for Real Final sales of domestic product. This is a measure of GDP less change in private inventories; equivalently, it is the sum of Personal Consumption Expenditures, private fixed investment, government consumption expenditures and gross investment, and net exports of goods and services.

The two thumbnails below show Year-over-Year Real Final Sales since the implementation of quarterly GDP in 1947. The one on the left highlights the value the quarter a recession starts. The one on the right highlights the value the quarter before a recession starts. You can click on either thumbnail and then use the links at the top to toggle between the two.

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There have been eleven recessions over this timeframe. the 2014 Q1 YoY Real Final Sales of 1.47% was lower than at the beginning of four recessions (left chart). But this metric for Q1 was lower than the quarter before all eleven recessions. Only once (Q3 1956) has this metric dropped to a level lower than Q1 2014 after logging a strong post-recession bounce.

GDP Revisions

Note that Wednesday's GDP update will also include the 2014 annual revisions for the most recent three years and for the first quarter of 2014. In addition, some GDP components will be revised back to the first quarter of 1999. The Bureau of Economic Analysis has published a preview of the revisions (PDF file, see page 6) that gives us some clues about those revisions.

Wednesday's GDP report will indeed be interesting!