Focus on Economic Data: U.S. Real GDP Growth, 2nd Quarter 2012 (Third Estimate)

INTRODUCTION

This lesson focuses on the February 25, 2011, second estimate of U.S. real gross domestic product (real GDP) growth for the fourth quarter (Q4) of 2010, as reported by the U.S. Bureau of Economic Analysis (BEA). The current data and historical data are explained. The meaning of GDP and potential impacts of changes of GDP are explored. This lesson will also raise questions about the impact of the current level of growth on the U.S. economy and individuals.

• Determine the current and historical growth of U.S. real gross domestic product.
• Identify the components of the measurement of the nation's gross domestic product.
• Assess the relationship of real GDP data, the indexes of economic indicators, and business cycles.
• Speculate about the nature and impact of current economic conditions and implications for the future.

PROCESS

On September 27, 2012, the U.S. Bureau of Economic Analysis announced the third (final) estimate of U.S. real gross domestic product growth for the second quarter (April-June) of 2012. In Q2 2012. Real GDP grew at an annualized rate of just 1.3 percent.

What is the U.S. Gross Domestic Product?

Current-dollar U.S. GDP, as defined by the BEA was \$15.586 trillion.  That was an increase of \$107.3 billion (2.8 percent annualized rate) over Q1.  In the first quarter of 2012, U.S. GDP grew \$157 billion or at a 4.2 percent annualized rate.  The pace of growth of the economy slowed in the second quarter.

Real GDP is the current dollar GDP adjusted for inflation.  It reflects the current value of all of the goods and services produced in a year, expressed the prices of the base-year. It might also be called "inflation-corrected" GDP or "constant dollar GDP."

U.S. real GDP in Q2 2012 was \$13,548.5 (base year 2005) .   The total current dollar increase in U.S. GDP from year 2005 to Q2 2012 was \$2.963 billion, but only \$925.5 billion of that growth was "real."

Note to Teachers and Students: Unless otherwise cited, the quoted sections of this lesson are from the BEA's September 27, 2012, "Gross Domestic Product: Second Quarter 2012," news release. www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_3rd.pdf Real GDP Growth Real GDP Growth

Bureau of Economic Analysis Press Release
National Income and Product Accounts
Gross Domestic Product: Second Quarter 2012 (Third Estimate)

Released: September 27, 2012

"Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2012 (that is, from the first quarter to the second quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent."

The second estimate of real GP growth in Q2 2012 (made in August) was 1.7 percent.  The third estimate was significantly lower than the earlier estimates.  The first (advance) estimate for Q2 made in July was 1.5 percent growth.  The BEA news release commented on the difference, "The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month."

Read the entire text of the September 27, 2012, BEA news release to learn more details about recent U.S. real GDP growth. Remember, the BEA releases the estimate for each quarter three times.  This was the third estimate for Q2 2012.   The first estimate for Q2 2012 was a growth rate of 1.5 percent.  The first estimate was revised upward to 1.7 percent in August.  This estimate revised the growth rate estimate downward to 1.3 percent. URL: www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_3rd.pdf

Students: Is a real GDP growth rate of 1.3 percent enough to be called a "recovery" from the recession?  Is it enough to create enough new jobs to lower the persistently high unemployment rate?

Quarterly estimates often vary over the three reporting months.   Example: For Q3 2011, the first estimate was 2.5 percent GDP growth.  The second estimate was 2.0 percent .  The final estimate (still subject to revision) was just 1.8 percent - a total drop of 0.7 percentage points.  You can access past GDP announcements at  www.bea.gov/histdata/NIyear.asp

Where was the GDP growth in Q2 2012?

The BEA identifies the primary areas of growth or decline in each news release. "The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, and residential fixed investment that were partly offset by negative contributions from private inventory investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased."

In addition, the BEA identifies the areas of "acceleration" and "deceleration," significant changes in the rates of growth or decline of sectors. "The deceleration in real GDP in the second quarter primarily reflected decelerations in PCE, in nonresidential fixed investment, and in residential fixed investment that were partly offset by smaller decreases in federal government spending and in state and local government spending and an acceleration in exports."

Figure 1, below, shows graphically the U.S. quarterly real GDP growth rates from the year 2000 through Q2 2012.   Note the real GDP negative growth in late 2008 and early 2009.   This is the period that looks like the traditional definition of a recession.  According to the National Bureau of Economic Research (NBER), the recession began in December, 2007, and ended in June, 2009 (www.nber.org/cycles.html .)

Students: Can you identify the periods of recession during this time span?

Remember, the formula to determine GDP (Y) is to add personal consumption expenditures (C), net private investment (I), government spending (G) and Net exports (X).

C + I + G + X = Y

The BEA breaks down the quarterly growth or decline by spending category - personal consumption expenditures (PCE), private investment, government spending, and net exports.   See Figure 2, below.

For a more detailed list of real GDP changes in Q2 by major category, see the press release. Scroll down to Table 2: www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_3rd.pdf

The BEA also breaks down the GDP data by key industry groups.www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_3rd.pdf   Scroll down to Table 3.

Students: Are you clear about the difference between the nominal (current dollar) GDP and the real (chained dollar) GDP measurements?

To compare the U.S. per capita GDP with the per capita GDPs of other nations, see the CIA World Factbook, www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html .  Remember, a high per capita GDP doesn't necessarily mean that all people in a country have high incomes or a high standard of living. In many instances, GDP figures for a nation do not accurately reflect the well-being of all individuals in that nation. If purchasing power varies among nations, the term “purchasing power parity” (PPP) is used to reflect economic data that has been adjusted by varying national price levels.

Annual GDP Estimate Revisions

According to the BEA annual revisions to GDP estimates are made each year in order to:

1. Incorporate most complete and reliable source data.
2. Provide a more detailed picture of the economy.
3. Make improvements to methods used for preparing the estimates.

Quarterly GDP data is seasonally adjusted to remove variations that normally occur at about the same time and in about the same magnitude each year—for example, weather, holidays, and tax payment dates. After seasonal adjustment, cyclical and other short-term changes in the economy stand out more clearly.  Annual data is not seasonally adjusted.

How reliable are BEA’s early GDP estimates and revisions?

The BEA explains, "For policymakers and businesses to better understand the economy and to formulate appropriate policies, up-to-date and accurate estimates of gross domestic product (GDP) are essential. BEA’s earliest GDP estimate—the “advance” estimate—is released roughly four weeks after the end of each quarter. The second and third estimates—which are released over the next two months—incorporate progressively more complete and more accurate source data as they become available from the Census Bureau, the Bureau of Labor Statistics, and other sources." [Source: BEA,  www.bea.gov/faq/index.cfm?faq_id=1000 ]

"While there is always a trade-off between timeliness and accuracy, BEA believes that the early GDP estimates have struck an appropriate balance, as the magnitude of the revisions to the early estimates tends to be small." A study of the BEA's revision process found these trends>:A recent study published in July 2011 Survey of Current Business found the following:

• The revisions to long-term growth rates are small, averaging less than 0.1 percentage point for average growth rates over the comprehensive benchmark revisions between 1985 and 2009.
• There are no substantial revisions—as measured by the shares of GDP or GDI—to key measures, such as investment and government expenditures or the national saving rate.
• The revisions to the contributions of key components of GDP growth are small and do not substantially change the ordinal rankings of the components’ contributions to growth over expansions and contractions.
• The overall pattern of change in GDP over business cycles is little changed by the revisions.

Source: "Revisions to GDP, GDI, and Their Major Components," Survey of Current Business, July, 2011. www.bea.gov/scb/pdf/2011/07%20July/0711_revisions.pdf

The 0.4 percentage point or 24 percent revision from the second estimate of 1.7 to the third estimate of 1.3 for Q2, 2012 was unusually large.  Most revisions are not as large, but it does happen once in a while.  On average, the BEA's GDP growth estimates are considered to be accurate.

"Seasonal adjustments remove recurring seasonal variations (variations that occur in the same month or quarter each year) from economic series so that the remaining movements in the series better reflect cyclical patterns in economic activity."  This how the BEA explains the reason for seasonal adjustments to monthly or quarterly data.

"For example, consumer spending for jewelry always declines in January, after the Christmas buying season ends. Thus, the strength in spending for jewelry for any given January is not determined by whether it increases or decreases -- it always decreases -- but by whether it decreases more or less than “normal decrease.”

"Other examples of economic series affected by seasonal patterns include: Consumer spending for clothing and consumer electronics, which decreases each January after the Christmas season ends; automobile production, which drops in July, as factories retool for new models; heating oil production, which increases during September, as producers anticipate the winter heating season; and home construction, which increases in March, as weather conditions improve."

Source: BEA, Frequently Asked Questions,   www.bea.gov/faq/index.cfm?faq_id=123

Students: What are more examples of seasonal factors or regular events that consistently affect the monthly or quarterly data?   Can you explain explain how these factors impact consumer or producer behaviors? Example: Some inductries are seasonal, such as outdoor construction that regularly slows during the winter months.

 What is the BEA? The Bureau of Economic Analysis (BEA), an agency of the U.S. Department of Commerce, “prepares national, regional, industry, and international accounts that present essential information on such key issues as economic growth, regional economic development, inter-industry relationships, and the Nation's position in the world economy.”  Source: BEA Mission Statement [Note to teachers: NIPAs (national income and product accounts) are the BEA's economic measurements that “display the value and composition of national output and the distribution of incomes generated in its production.” Source: BEA Glossary ]

Students: How do you feel about the health of the U.S economy?  Is it getting better?  Worse?  Is 1.7 or even 3 percent GDP growth enough when almost 13 million Americans are still unemployed and many more are underemployed?

CONCLUSION

"Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2012 (that is, from the first quarter to the second quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent."  (U.S. Bureau of Economic Analysis, Gross Domestic Product: Second Quarter 2012 (September 27, 2012.)

The BEA's estimate of U.S. real GDP growth fell from the 1.7 percent growth estimated in August to the final estimate of 1.3 percent.  The difference is a total of \$16 billion in output.  If the final estimate is correct, the second estimate was 23.5 percent off.  Measuring GDP, employment, prices, etc. is difficult?

One thing about he current estate of the U.S. economy is pretty clear.  If unemployment is high, the economy will not be producing at its full or normal output. Since so many people are not working, their labor resources are not being used effectively. What is the relationship between unemployment and output?

Okun’s Law

In 1962, economist Arthur Okun theorized that there is a predictable relationship between unemployment and national output (GDP). Okun's Law correlates changes in real GDP and changes in the unemployment rate. He said that real GDP grows at about 3% per year when unemployment is normal.

For every point above 3.0 percent unemployment, the nation’s GDP decreases by 2%. And, it also works in reverse – each percentage point under 3.0 results in an additional 2 percent in GDP growth. For example, if the U.S. unemployment rate is 9.0 percent, 6.0 percent over the 3.0 average, GDP is reduced by 12 percent.

Many suggest that this historic relationship between unemployment and the “GDP gap” no longer exists – at least to the degree that Professor Okun suggested. The economy grew at a greater rate in late 2009, despite an even higher unemployment rate. The new concept is the “jobless recovery,” made possible by technology and greatly improved productivity.

Are we in a "new economy," one where the relationship between employment and output has changed?

Keep an eye on the employment and GDP data for the rest of the year.

EXTENSION ACTIVITY

The U.S. Central Intelligence Agency (CIA) “World Factbook” ranks the nations of the by various economic measures, including gross domestic product. The largest fifteen nations by GDP are listed below (rankings as of 2011).

Rank    Country                                GDP (millions of US dollars)

1          European Union                  \$15,390
2         United States                         \$15,040*
3         China                                      \$11,300
4         India                                        \$4,463
5         Japan                                      \$4,389
6         Germany                                \$3,085
7         Russia                                    \$2,373
8         Brazil                                       \$2,284
9         United Kingdom                    \$2,250
10       France                                    \$2,214
11        Italy                                         \$1,826
12        Mexico                                   \$1,651
13        South Korea                         \$1,559
14        Spain                                     \$1,411