Sunday, January 25, 2015

GDP: Annual and Q4-over-Q4

by Bill McBride on 1/25/2015 11:40:00 AM

The advance estimate for Q4 GDP will be released this week. The consensus forecast is that real GDP increased 3.2% annualized in Q4.

The FOMC GDP projections are for Q4-over-Q4.  The most recent FOMC projection was for real GDP to increase 2.3% to 2.5% Q4 2014 over Q4 2013.

However many analysts forecast annual GDP, so here is a discussion of the difference between annual and Q4-over-Q4:

• The Bureau of Economic Analysis (BEA) reports real GDP growth on a seasonally adjusted annual rate (SAAR) basis. So this is adjusted for inflation (real), seasonally adjusted, and annualized.  Other countries report GDP differently - as an example China reports GDP growth on a year-over-year basis, and the UK reports GDP growth for each quarter, but not annualized.  A 3.2% annualized real growth rate in the US would be reported at 0.79% quarterly in the UK (not annualized).

Note: the easiest way to calculate the real change in GDP is to use the chained 2009 dollars series. Nominal GDP in 2014 was around $17.5 trillion.

•  Calculating the Q4 GDP forecast: Using the consensus forecast of 3.2% real GDP growth in Q4, real GDP (2009 dollars) would be $16,333.7 billion (SAAR) in Q4.  To calculate this, use Table 1.1.6. Real Gross Domestic Product, Chained Dollars at the BEA.  The BEA reported Q3 GDP was $16,205.6 billion (SAAR).  Multiply this by (1.032 ^ .25) to calculate Q4 real GDP (2009 dollars, SAAR).

Calculating Q4-over-Q4 GDP growth: The BEA reported real GDP in Q4 2013 was $15,916.2 billion (SAAR, 2009 dollars). So the Q4-over-Q4 growth rate would be $16,333.7 (Q4 2014 forecast) divided by $15,916.2 (Q4 2013). That would be 2.6% (slightly above the December FOMC projections).

Calculating 2014 GDP growth: To calculated GDP growth for 2013, first we calculate the annual real GDP for 2014 (this is an average of GDP for the four quarters).  Using the forecast GDP for Q4, the 2014 annual GDP would be $16,095.4 billion.   The annual real GDP (2009 dollars) for 2013 was $15,710.3 billion.  So the 2014 annual growth rate would be $16,095.4 (four quarter average using Q4 forecast) divided by $15,710.3 (2013 real GDP). This would be 2.5%.

Not much difference between the annual rate and Q4-over-Q4, but it might be a little confusing when GDP is reported this week.  Some articles might report the Q4-over-Q4 growth rate that the FOMC is looking at - other articles might report 2014 over 2013.

Of course most of the focus will be on the quarterly GDP rate (and also inflation).