Meet the Author

Timothy Dunne |

Vice President

Timothy Dunne

Timothy Dunne is a former vice president and economist of the Federal Reserve Bank of Cleveland.

Read full bio

Meet the Author

Brent Meyer |

Economist

Brent Meyer

Brent Meyer is a former economist of the Federal Reserve Bank of Cleveland.

08.06.07

Economic Trends

The Advance GDP Report

Tim Dunne and Brent Meyer

Real Gross Domestic Product (GDP) grew at a 3.4 percent annual rate in the second quarter of 2007, according to the advance estimate released by the Bureau of Economic Analysis (BEA). The acceleration from first quarter’s four-year low (0.6 percent) reflected strong increases in private nonresidential investment and exports, a decline in imports, and some slowing in the recent losses in residential fixed investment. A decrease in personal consumption expenditures in the second quarter—from 3.7 percent to 1.3 percent—partly offset the gains seen in the other components. The decrease in personal consumption expenditures was primarily due to a drop in demand for durable and nondurable goods, which fell from 8.8 percent to 1.3 percent and 3.0 percent to −0.8 percent, respectively.

Real GDP and Components 2007:Q2

  Change, billions of 2000$

Annualized percent change, last:
Quarter Four quarters
Real GDP
95.3
3.4
1.8
  Personal consumption
25.7
1.3
2.9
    Durables
5.0
1.6
5.0
    Nondurables
−4.8
−0.8
2.4
    Services
25.2
2.2
2.7
  Business fixed investment
25.9
8.1
3.4
    Equipment
5.9
2.3
0.1
    Structures
14.5
22.2
11.5
  Residential investment
−12.1
−9.2
−15.9
  Government spending
20.9
4.3
2.0
    National defense
11.2
9.4
3.0
  Net exports
34.2
    Exports
21.2
6.4
6.8
    Imports
−13.1
−2.6
2.0
Change in business inventories
3.5

Source: Bureau of Economic Analysis.

Looking at the contribution of individual components to the percent change in real GDP, we see that business fixed investment added 0.8 percent to real GDP growth, doubling its average contribution of 0.4 percent over the last four quarters. Also, the free fall in residential fixed investment abated somewhat, and this component took away only 0.5 percentage point of growth, compared to 0.9 over the last four quarters. Exports grew in the second quarter almost as strongly as they had over the past year, adding 0.7 percentage point; and imports actually fell for the first time since 2003, boosting real GDP growth by one-half of a percentage point.

Real GDP growth for the second quarter came in slightly above expectations and its 30-year average of 3.2 percent. The July 10 Blue Chip forecast had predicted second-quarter growth of 3.0 percent. Looking ahead to the next four quarters, expectations are for growth to average 2.8 percent.

It is important to note that the most recent data are from the advance estimate and are subject to further revisions that may significantly change our current perceptions. Not only does the BEA revise current data, once a year (usually in July) it also “benchmarks” historical data to “incorporate newly available and more comprehensive source data, as well as improve estimating methodologies.” The most recent benchmark revised the data back to 2004, considerably changing what we thought we knew about the economy over the past few years.

The estimates were almost exclusively revised down. In fact, the estimate for the average annualized percent change of real GDP in 2004 was revised down to 2.7 percent from 3.0 percent. The revisions were just as striking for personal consumtion expenditures and private fixed investment. Annualized average growth of personal consumption expenditures dropped to 3.3 percent from 3.6 percent, and private fixed investment dropped from 3.6 to 3.2 on average. An implication of these downward revisions in real GDP growth is that productivity growth may not have been as robust as previously thought. However, the revisions to the productivity growth series will also depend upon upcoming revisions that the BLS makes to the payroll series. If payrolls are also revised downward, then the net effect on the productivity numbers remains uncertain.