Today the Bureau of Economic Analysis of the U.S. Department of Commerce released its advance estimate of the Real Gross Domestic Product for the third quarter of 1995. It was estimated that GDP---the output of goods and services produced by labor and property located in the United States---increased during the past quarter at an annual rate of 4.2%, or $56.8 billion. This compares with growth rates of 2.7% and 1.3% during the first and second quarters and an annual growth rate of 4.08% for all of 1994.
Contributing to the estimated increase were increases in personal consumption expenditures ($26.8 billion), nonresidential fixed investment ($15.3 billion), residential fixed investment ($5.8 billion), business inventories ($1.0 billion), net exports ($0.9 billion), and government expenditures ($7.0 billion).
You may have noticed above that I referred to today's release as an advance estimate of the third quarter GDP. In other words, today's number is not the final, definitive value for the third quarter GDP. Quarterly estimates of GDP are released on the following schedule: Advance estimates, based on preliminary and incomplete source data and Bureau of Economic Analysis (BEA) assumptions about the missing source data, are released in the first month after the end of the quarter. As additional and revised data become available, preliminary and final estimates are released in the second and third months.
The BEA has studied changes experienced in the past between the initial (advance) GDP value and the final value reported for the quarter. They reported their findings in terms of the probability of the revisions falling within a certain range. Specifically, they determined that two-thirds of revisions to Real GDP fell between -0.7 to 0.9. Similarly, they determined that nine-tenths of revisions to GDP would fall between -1.1 and 1.6. Thus, based on past experience, there is a two-out-of-three chance that the third quarter change in GDP now estimated at 4.2% will not be revised below 3.5% or above 5.1% in the next two releases. Likewise, there is a nine-out-of-ten chance that today's estimate will not be revised below 3.1% or above 5.8%.
On the one hand, we might be surprised, shocked, disheartened and confused by all this uncertainty (particularly since this aspect of the GDP reports is never discussed in the popular financial press). On the other hand, we might take some encouragement from what we now know about the GDP estimation process. We know, for example, that there is a 90% probability that the final number for the third quarter will not be revised below 3.1%. Most analysts have been predicting a change for the quarter of around 2.5%. But, what we have just learned tells us that there is a very good chance of beating those estimates. So, even though the widely quoted 4.2% figure contains a large uncertainty factor, we can still be fairly certain that, in the final analysis, the growth in GDP in the third quarter may still be more than twice that of the second quarter.
In other news, the University of Michigan revised the October value of its index of consumer sentiment down from 90.4 to 90.2. The index is one of the 11 indicators that the Commerce Department uses in formulating its Composite Index of Leading Economic Indicators (LEI). The index appears to be in a short-term downtrend. Today's value is 1.3% higher than the final September reading of 88.9; but, is still 4.2% below the recent peak of 94.4 in July and 1.5% below the 91.7 reading in August.
Byline: Lafferty (MF Merlin)