*See the navigation bar at the right side of the technical note text for supplementary materials.

Technical Note
Gross Domestic Product
Second Quarter of 2012 (Third Estimate)
September 27, 2012
This technical note provides background information about the source data and
estimating methods used to produce the estimates presented in the GDP news release.
The complete set of estimates for the second quarter is available on BEA's Web site at
www.bea.gov; a brief summary of "highlights" is also posted on the Web site.  In a few
weeks, the estimates will be published in BEA's monthly journal, the Survey of Current
Business, along with a more detailed analysis of the estimates ("GDP and the

Sources of Revision to Real GDP

Real GDP increased 1.3 percent (annual rate) in the second quarter, which was 0.4
percentage point less than in last month’s estimate.  The revision to GDP reflected
downward revisions to inventory investment, to consumer spending, and to exports:

*	The downward revision to inventory investment was primarily to farm inventories
        and reflected newly available and revised farm income statistics from the
        Economic Research Service (ERS) of the U.S. Department of Agriculture. The
        effects of this summer’s hot weather and drought on GDP and GDI are discussed
        in more detail below in the section, “Effects of the Midwest Drought.”
*	The downward revision to consumer spending was primarily to services. Within
        services, the largest contributor to the revision was financial services and
        insurance, based on newly available Census Bureau quarterly services survey
        data for the second quarter and on newly available FDIC Call Report data.
*	The downward revision to exports was mostly to services exports. Within
        services, the largest contributor was travel, based on revised data from the
        international transactions accounts.

The price index for gross domestic purchases—the prices paid by U.S. residents for
goods and services wherever produced—increased 0.7 percent in the second quarter,
0.1 percentage point less than in last month’s estimate.

Gross Domestic Income and Corporate Profits

Real gross domestic income (GDI), which measures the output of the economy as the
costs incurred and the incomes earned in the production of GDP, increased 0.2 percent
in the second quarter, 0.4 percentage point less than in last month’s estimate.  Real GDI
increased 3.8 percent in the first quarter.  For a given quarter, the estimates of GDP and
GDI differ due to the incorporation of largely independent source data.  Over longer time
spans, however, the estimates of GDP and GDI tend to follow similar patterns; over the
last four quarters, real GDP increased 2.1 percent and real GDI increased 2.0 percent.

Profits from current production increased $21.8 billion, or 1.1 percent (quarterly rate), in
the second quarter.  Domestic profits of financial corporations decreased $39.7 billion,
domestic profits of nonfinancial corporations increased $27.8 billion, and rest-of-the-
world profits increased $33.6 billion.

Effects of the Midwest Drought

BEA’s GDP estimates reflect the effects of this summer’s extreme hot weather and
drought in the Midwest on farm production.  For the most part, these effects are
embedded in the regular source data that are used by BEA.  Where they are not, BEA
prepares adjustments to account for the effects using its regular methodologies.  While
the drought could indirectly affect many components of GDP, such as personal
consumption expenditures and exports, it is only possible to separately identify its effects
on a few components, such as the change in farm inventories on the expenditure side of
GDP and farm proprietors’ income on the income side (GDI).

The production of agricultural crops is reflected in the expenditure-side estimates of
GDP in the change in farm inventories.  Because crop production takes place throughout
the year, even if crops are harvested only once a year, BEA’s estimates spread the
value of crop output throughout the year.  For each quarter, the change in farm
inventories of crops is calculated as the estimated crop output allocated to that quarter,
less crops sold, plus net Commodity Credit Corporation loan transactions.

The regular source data used by BEA for estimating crop output and sales are the U.S.
farm income and wealth statistics, which are published by the ERS.  The most recent
farm income statistics, which were issued on August 28, 2012, form the basis for BEA’s
revised estimates of farm inventories and farm proprietors’ income that were
incorporated in today’s GDP estimate.  BEA also used other ERS reports to adjust the
quarterly pattern of crop output to reflect the effects of the extreme hot, dry weather in
the Midwest during June and July.  (The losses in June are reflected in the second
quarter estimates; additional losses during July will be reflected in next month’s third-
quarter GDP estimate.)  In current dollars, second-quarter crop output was revised down
about $12 billion, and market sales were revised down about $4 billion, leading to a
downward revision in farm inventories of $7.8 billion.  After adjusting for inflation, the
change in real farm inventories was revised down $5.7 billion (chained 2005 dollars) for
the second quarter.

Many farmers participate in crop insurance programs; crop insurance benefits are
included in the quarters when the losses occurred on an accrual basis. Crop insurance
benefits do not directly affect either GDP or GDI (there are offsetting effects on
components of income), but do affect personal income, specifically, farm proprietors’
income. In the second quarter, about $6 billion in losses to the farm sector were offset by
crop insurance benefits. Consequently, the downward revision to farm proprietors’
income of $2.7 billion in the second quarter was smaller than the revisions to crop output
and inventories. Federal government funding of crop insurance is reflected in a revision
to net insurance settlements within business current transfer payments to government.

Additional information about the methodology is available in an FAQ on BEA’s website,
How will the effects of the 2012 Midwest drought be reflected in GDP?"

Brent R. Moulton
Associate Director for National Economic Accounts
Bureau of Economic Analysis
(202) 606-9606