Focus on Economic Data: U.S. Real GDP Growth, Final Estimate Q4 2012, March 28, 2013

STUDENT'S VERSION

This lesson printed from:
http://www.econedlink.org/lessons/index.php?lid=865&type=student

INTRODUCTION

This lesson focuses on the BEA's third and final estimate of real GDP released on March 28, 2013, for the fourth quarter of 2012 (October-December.) Understanding the level and rate of growth of the economy's output (GDP) helps to better understand growth, employment trends, the health of the business sector, and consumer well-being. 

Each real GDP lesson during a semester will provide the most up-to-date data and focus on some specific topics or issues related to GDP.

TASK

  • 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

The U.S. Bureau of Economic Analysis makes three estimates of gross domestic product for each fiscal quarter.  The estimates may vary, based on new or revised data. For Q4 of 2012, the first estimate (January) was a fall in real GDP of 0.1 percent and a rise in current dollar GDP of just 0.5 percent. 

The second estimates for Q4, made in February, were more positive, 0.1 percent growth in real GDP and 1.0 percent growth in current dollar GDP.  The third estimate, made March 28, 2013, were much better than the second, 0.4 percent growth in real GDP and 1.3 percent growth in current dollar, but still not a very positive sign for the economy. 

The BEA commented on the revision, "The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, real GDP increased 0.1 percent. While nonresidential fixed investment is higher than previously estimated, the revision to GDP has not changed the general picture of the economy."

Although the real GDP growth rate estimate was much better in March than in January or February, it was still lagging the growth rate necessary for many to call a "real" recovery.  Recovery from the 2008-2008 recession has been historically slow, especially in terms of job growth.

Take a look at U.S. GDP real growth for the fourth quarter of 2012 and decide for yourself if this real GDP estimate is "good news."

Note:  Unless otherwise cited, quoted materials in this lesson are from the Bureau of Economic Analysis March 28, 2013, announcement of the final estimate of U.S. gross domestic product for the fourth quarter of 2012. 
www.bea.gov/newsreleases/national/gdp/2013/gdp4q12_3rd.htm

News Release:

Gross Domestic Product, 4th quarter 2012 and annual 2012 (third estimate)
U.S. Bureau of Economic Analysis
Released March 28, 2013

"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 0.4 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent."

Students: you should be able to determine an annual percentage rate of increase. 

  1. Subtract the previous real GDP level (Q3 2012) from the current level (Q4 2012). 
  2. Divide the difference by the previous level.
  3. Multiply that percentage by 4 (quarters.)

Students Does it make sense to revise and report GDP growth three times over three months following each quarter?  What kind of new information might result in a revision? 

As usual, the BEA commented on the increase or decrease in real GDP citing two measurements of change. When they use the term “acceleration,” they refer to the rate of change. The real GDP announcement also cites the “increase” or the dollar value increase in the various sectors. The two following paragraphs from the news release identify the sectors that contributed to the total increase or subtracted from the increase in two ways. Imports, for example, increased as part of the total, but at a slower rate of change.

"The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment that were partly offset by negative contributions from private inventory investment, federal government spending, exports, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased." 

"The deceleration in real GDP in the fourth quarter primarily reflected downturns in private inventory investment, in federal government spending, in exports, and in state and local government spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in imports, and an acceleration in PCE."

Each month recently, the BEA has commented specifically on two important product groups – motor vehicles and computers. "Motor vehicle output added 0.18 percentage point to the fourth-quarter change in real GDP after subtracting 0.25 percentage point from the third-quarter change. Final sales of computers added 0.10 percentage point to the fourth-quarter change in real GDP after adding 0.11 percentage point to the third-quarter change."

Students: It is not unusual for the first, second and third estimates for a quarter to vary greatly.  Quite often, new or more complete data can change the estimate significantly.  What new data resulted in the change of the Q4 2013 estimate?

From quarter to quarter, real GDP growth rates can vary significantly.  Figure 1, below, shows the growth rates of U.S. real GDP from 2000 through 2012. Note the business cycles – periods of growth and decline. Business cycles are defined later in this lesson.

Figure 1

Students:  Can you identify the recent periods of recession?  To confirm the "official" recessions identified by the National Bureau of Economic Research (NBER), go to: www.nber.org/cycles/cyclesmain.html ]

A Note About “Real” GDP Growth

To adjust for the effect of inflation and to determine “real” GDP, the BEA uses a price index. The price index for gross domestic purchases is the “percent change in the price index for gross domestic purchases. This index measures the prices of goods and services purchased by U.S. residents, regardless of where the goods and services are produced. The gross domestic purchases price index is derived from the prices of personal consumption expenditures, gross private domestic investment, and government consumption expenditures and gross investment. Thus, for example, an increase in the price of imported cars would raise the prices paid by U.S. residents and thereby directly raise the price index for gross domestic purchases.”

For Q4 2012, the BEA stated in the news release, "The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.6 percent in the fourth quarter, 0.1 percentage point more than the second estimate; this index increased 1.4 percent in the third quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.2 percent in the fourth quarter, the same increase as in the third."

What sectors grew or declined in Q4 2012?

  • Real personal consumption expenditures "increased 1.8 percent in the fourth quarter, compared with an increase of 1.6 percent in the third. Durable goods increased 13.6 percent, compared with an increase of 8.9 percent. Nondurable goods increased 0.1 percent, compared with an increase of 1.2 percent. Services increased 0.6 percent, the same increase as in the third.
     
  • Real nonresidential fixed investment "increased 13.2 percent in the fourth quarter, in contrast to a decrease of 1.8 percent in the third. Nonresidential structures increased 16.7 percent; it was unchanged in the third quarter. Equipment and software increased 11.8 percent, in contrast to a decrease of 2.6 percent. Real residential fixed investment increased 17.6 percent, compared with an increase of 13.5 percent."
     
  • Real exports of goods and services "decreased 2.8 percent in the fourth quarter, in contrast to an increase of 1.9 percent in the third."  Real imports of goods and services "decreased 4.2 percent, compared with a decrease of 0.6 percent.

 

  • Real federal government consumption expenditures and gross investment "decreased 14.8 percent in the fourth quarter, in contrast to an increase of 9.5 percent in the third. National defense decreased 22.1 percent, in contrast to an increase of 12.9 percent. Nondefense increased 1.7 percent, compared with an increase of 3.0 percent." Real state and local government consumption expenditures and gross investment "decreased 1.5 percent, in contrast to an increase of 0.3 percent."

 

  • Change in real private inventories "subtracted 1.52 percentage points from the fourth-quarter change in real GDP, after adding 0.73 percentage point to the third-quarter change. Private businesses increased inventories $13.3 billion in the fourth quarter, following increases of $60.3 billion in the third quarter and $41.4 billion in the second."

Students: Inventories subtracted from U.S. GDP in Q4 2011 (minus 1.52 percent.)    Students: What  might this mean? Is this a good sign?

A Reminder:

The formula for determining GDP is:

Figure 2

Other Measures of U.S. Output

  • Gross domestic purchases  "purchases by U.S. residents of goods and services wherever produced -- was unchanged in the fourth quarter, compared with an increase of 2.6 percent in the third."
     
  • Real gross national product "the goods and services produced by the labor and property supplied by U.S. residents -- increased 0.9 percent in the fourth quarter, compared with an increase of 2.9 percent in the third. GNP includes, and GDP excludes, net receipts of income from the rest of the world, which increased $19.2 billion in the fourth quarter after decreasing $4.7 billion in the third; in the fourth quarter, receipts increased $25.3 billion, and payments increased $6.2 billion.

 

  • Current-dollar GDP "the market value of the nation's output of goods and services increased 1.3 percent, or $53.1 billion, in the fourth quarter to a level of $15,864.1 billion. In the third quarter, current-dollar GDP increased 5.9 percent, or $225.4 billion."

US current dollar GDP at the end of Q4 2012:   $15,864,100,000,000

U.S. Gross Domestic Product for the Full Year of 2012

In addition to the regular quarterly real GDP estimate, the BEA adds to this report the annual averages for 2012.  Note that this is an average of the four quarters and may be considerably less or more than the any one of the quarterly real GDP figures.  In this case, the difference is small.

"Real GDP increased 2.2 percent in 2012 (that is, from the 2011 annual level to the 2012 annual level), compared with an increase of 1.8 percent in 2011."

"The increase in real GDP in 2012 primarily reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, exports, residential fixed investment, and private inventory investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased."

"The acceleration in real GDP in 2012 primarily reflected a deceleration in imports, upturns in residential fixed investment and in private inventory investment, and smaller decreases in state and local government spending and in federal government spending that were partly offset by decelerations in PCE and in exports."

Real Gross Domestic Income

"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 2.6 percent in the fourth quarter, compared with an increase of 1.6 percent in the third. For a given quarter, the estimates of GDP and GDI may differ for a variety of reasons, including the incorporation of largely independent source data. However, over longer time spans, the estimates of GDP and GDI tend to follow similar patterns of change."

Real vs. Current Dollar GDP

Figure 3, below, shows the U.S. current dollar and constant dollar (real) GDP data from 2000 through 2012. The difference between the current dollar figure and the constant dollar figure is the effect of inflation. These figures are in billions of U.S. dollars.

Figure 3

*Note:  The 2007-2011 GDP data has been revised from previous estimates.  According to these revised BEA figures, U.S. real GDP decreases very slightly from 2007 to 2008 and dramatically decreased in 2009.  By the end for 2010, real GDP had surpassed the previous high level achieved in 2007. Also note the difference between the 2012 current dollar and 2012 constant dollar GDP.  The difference is the result of inflation.

Students: Can you use the above data to determine meaning of the “current dollar” and “constant dollar” measurements of GDP?  Can you explain this in terms of the real purchasing power of income over time?

U.S. Per Capita GDP

At the end of the year 2012, the Census Bureau estimated the U.S. population to be 315,427,320 (resident and military abroad). Dividing the current dollar GDP by the population determines the per capita (per person) GDP.

Population              315,427,320

GDP                        $15,684,800,000,000

U.S. per capita GDP   $49,725.56

Business Cycles and Recessions

The BEA tracks changes in real GDP, the traditional measurement used to identify business cycles. Though it is a critical measure, real GDP is not the sole determinant in the identification of recessions. A recession, a "significant decline in economic activity spread across the economy, lasting more than a few months," is identified by the National Bureau of Economic Research (NBER) "Business Cycle Dating Committee." In addition to real GDP, the key measurements in the determination of a recession are real income, payroll employment, industrial production, and wholesale-retail sales. Recently, the NBER has identified payroll employment as the key criteria used to identify business cycles.

In its announcement of the beginning of the recession in December 2008, the NBER committee cited these trends in economic activity.  Payroll employment “reached a peak in December 2007 and has declined every month since then.

"Real personal income less transfer payments, real manufacturing and wholesale-retail trade sales, industrial production, and employment "all reached peaks between November 2007 and June 2008.”

In September, 2009, the NBER identified the end of the recession.  "The committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months."

Business cycles are fluctuations in aggregate economic activity in cycles of expansion, peak, contraction, and trough. In a business cycle, several macroeconomics variables will move together (not lock-step in short periods) in a general trend. The cycles recur, but there is no consistent pattern of depth or length of time. The NBER will not identify a business cycle downturn as a recession unless it meets these general qualities and the declines are sufficient enough to meet the description as a "significant decline in economic activity spread across the economy, lasting more than a few months."

Figure 4, below, illustrates a "typical" business cycle, with periods of expansion, peak, decline and trough. 

Figure 4

Measuring Economic Activities – Economic Indicators

Much attention is paid in the media to the "Index of Leading Indicators," a composite index used to estimate future economic activity. The Index is determined by The Conference Board, "a global independent membership organization working in the public interest. It publishes information and analysis, makes economics-based forecasts and assesses trends, and facilitates learning by creating dynamic communities of interest that bring together senior executives from around the world." 

The Index consists of a variety of measures of economic activity that have historically turned downward before contractions and upward before expansions. The Conference Board created a single index value, a "composite index," composed of ten variables. Many economists believe that the Index of Leading Indicators can "provide an early warning system so that policymakers can shift toward macroeconomic stimulus when the index fails."

The Conference Board's most recent report on Global Business Cycle Indicators ” was released on March 21, 2013.

The various cyclical indicators used by the Conference Board are classified into three categories—leading, coincident, and lagging, based on their timing in relation to the business cycle.

"The Conference Board Leading Economic Index® (LEI) for the U.S. rose 0.5 percent in February to 94.8 (2004 = 100), following a 0.5 percent increase in January, and a 0.4 percent increase in December."

Ataman Ozyildirim, economist at The Conference Board:, commented, “This month’s increase in the U.S. LEI – the third consecutive – was widespread and driven by a majority of its components. Even though consumer expectations and manufacturing new orders remain weak, the economy continues to expand slowly, and may be developing some resilience against headwinds from, for example, federal spending cuts due to improving residential construction and labor market conditions. Meanwhile, the U.S. CEI posted a small gain following January’s sharp drop due to a decline in personal income.”

Ken Goldstein, economist at The Conference Board, commented, “The U.S. economy is growing slowly now, and with this reading increases hope that it may pick up some momentum in the second half of the year. However, this latest report does not yet capture the recent effects of sequestration, which could dampen the pickup in GDP.”

"The Conference Board Coincident Economic Index® (CEI) for the U.S. increased 0.2 percent in February to 105.1 (2004 = 100), following a 1.0 percent decline in January, and a 0.9 percent increase in December."

"The Conference Board Lagging Economic Index® (LAG) increased 0.1 percent in February to 118.0 (2004 = 100), following a 1.6 percent increase in January, and no change in December."

Coincident indicators, such as employment, production, personal income, and manufacturing and trade sales, measure current aggregate economic activity.

  • Employees on nonagricultural payrolls
  • Personal income less transfer payments
  • Index of industrial production
  • Manufacturing and trade sales


Leading indicators, such as average weekly hours, new orders, consumer expectations, housing permits, stock prices, and the interest rate spread, tend to change direction ahead of the business cycle

  • Average weekly hours, manufacturing
  • Average weekly initial claims for unemployment insurance
  • Manufacturers’ new orders, consumer goods and materials
  • Vendor performance, slower deliveries diffusion index
  • Manufacturers’ new orders, nondefense capital goods
  • Building permits, new private housing units
  • Stock prices, 500 common stocks 
  • Money supply, M2
  • Interest rate spread, 10-year Treasury bonds less Federal funds (%)
  • Index of consumer expectations


Lagging indicators tend to change direction after the coincident indicators. Lagging indicators represent costs of doing business, such as inventory-sales ratios, change in unit labor costs, average prime rate charged by banks, and commercial and industrial loans outstanding. Lagging indicators, such as the ratio of installment credit outstanding to personal income, the change in consumer prices for services, and average duration of unemployment reflect consumer behavior. The lagging indicators may confirm the trends identified with the leading and coincident indicators.

  • Average duration of unemployment
  • Inventories to sales ratio, manufacturing and trade
  • Change in labor cost per unit of output, manufacturing (%)
  • Average prime rate charged by banks (%)
  • Commercial and industrial loans outstanding
  • Consumer installment credit outstanding to personal income ratio
  • Change in consumer price index for services (%)


Students: If you want more details about the meanings of the leading, concurrent and lagging economic indicators, go to the Conference Board web page: Economic Indicators .

Which of the leading indicators gives you the best information about the future measure of  real GDP?

CONCLUSION

Figure 5, below, shows the changes in the major components of U.S. gross domestic product from 2010 to 2012, and the levels of those components in 2012. Note that personal consumption expenditures are, by far, the largest component of GDP - typically about 70 percent of the total. Many analysts say that the true recovery from the recession will happen only when consumers increase their spending to previous levels. Others add that it will take increased business investment that results in greater job creation. 

Figure 5

Recent government policy decisions to promote growth in the economy are aimed at stimulating one or more of the components - consumer spending, investment, government spending, or exports. The overall goal is to stimulate aggregate demand.

Aggregate demand can also be illustrated by the formula AD = C + I + G + (X-M):

  •     C = Consumers' expenditures on goods and services
  •      I = Investment spending by companies on capital goods
  •     G = Government expenditures on publicly provided goods and services
  •     X = Exports of goods and services
  •     M = Imports of goods and services


By direct government spending, creating jobs, promoting investment, and increasing output, employment is increased and income is created.  As those with new jobs earn income, they increase their spending - increasing aggregate demand.  The $787 billion federal stimulus (American Recovery and Reinvestment Act of 2009) was intended to do just that. The U.S. government’s www.Recovery.Gov web site reports the impact of the stimulus programs.

ASSESSMENT ACTIVITY

EXTENSION ACTIVITY

Take another look at The Conference Board's  "Leading Economic Index" for the United States.

Which of these data points do you think are good indicators of the future health of the U.S. economy?

  • Average weekly hours, manufacturing
  • Average weekly initial claims for unemployment insurance
  • Manufacturers’ new orders, consumer goods and materials
  • Vendor performance, slower deliveries diffusion index
  • Manufacturers’ new orders, non-defense capital goods
  • Building permits, new private housing units
  • Stock prices, 500 common stocks
  • Money supply, M2
  • Interest rate spread, 10-year Treasury bonds less Federal funds (%)
  • Index of consumer expectations

Research one of these leading indicators. Summarize what it tells us about the future. For descriptions of the components of the Leading Economic Index, go to: www.conference-board.org/data/bci/index.cfm?id=2160 .

U.S. Indicators

Link to The Conference Board's most recent press release "The Conference Board Consumer Confidence Index Decreases," March 23, 2013.  www.conference-board.org/data/bcicountry.cfm?cid=1

Global Indicators

For a look at global indicators, go to The Conference Board, "Global Economic Outlook, 2013," URL: http://www.conference-board.org/data/globaloutlook.cfm