INTRODUCTION

Each month, the Bureau of Economic Analysis (BEA), an agency of the U.S. Department of Commerce, releases an estimate of the level and growth of U.S. gross domestic product (GDP), the output of goods and services produced by labor and property located in the United States.

This lesson focuses on the BEA's second estimate of real GDP released on November 22, 2011, for the third quarter (Q3) of 2011 (July-September.)  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 monthly real GDP lesson 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

Real Gross Domestic Product News Release
Bureau of Economic Analysis
U.S. Department of Commerce

Released: November 22, 2011

"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 2.0 percent in the third quarter of 2011 (that is, from the second quarter to the third quarter) according to the "second" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent."

This was the BEA's second estimate of real GDP for Q3 2011.  The previous (advance) estimate, made in October, was a real GDP growth rate of 2.5 percent. The real GDP estimate for Q3 was revised downward.

The BEA announcement explains."The GDP estimates released today are based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 2.5 percent."

Students: Remember, real GDP is reported for "fiscal quarters" - three month periods.  The BEA reports lag the reported time period.

While less growth than many economists and analysts deem necessary for a more solid economic recovery, the 2.0 percent growth rate reported in November is positive news for the economy, given that many suggest the U.S. is headed for another recessionary period.  Many economists and analysts suggest that a 4 to 5 percent growth rate over a long period of time is necessary for true economic recovery and to create a significant number of new jobs.

Students:  Is a 2.0 percent growth seems good or bad?  The average annual U.S. real GDP growth since 1947 has been over 3.2 percent.

Figure 1, below, shows the quarterly U.S. real GDP growth rates from 1990 through the Q3 2010 second estimate.  Note the up-down cycles of increased growth and declines in the rate of growth - or real declines.  Also note the negative real GDP growth in 2008 through Q2 2009 - the most recent recession.

figure 1

Students: Note the period of 2008-2009 - the recent recession. Do you see what look like other recessionary periods on the graph?

Q3 2011 Real GDP Highlights

The BEA reported that the Q3 real growth, "primarily reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, exports, and federal government spending 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." This note mentions those sectors that contributed to the total GDP growth or decline. 

The BEA also points out those sectors that contributed positively or negatively to the increase (decrease) in GDP growth from the previous quarter. "The acceleration in real GDP in the third quarter primarily reflected accelerations in PCE and in nonresidential fixed investment, a smaller decrease in state and local government spending, a deceleration in imports, and an acceleration in exports that were partly offset by a larger decrease in private inventory investment."  Real GDP growth on Q2 was just 1.3 percent.

The BEA often reports on key products of interest to data users.  In recent reports, the BEA has singled out motor vehicle and computer sales.

"Final sales of computers added 0.22 percentage point to the third-quarter change in real GDP after adding 0.07 percentage point to the second-quarter change."

"Motor vehicle output added 0.18 percentage point to the third-quarter change in real GDP after subtracting 0.10 percentage point from the second-quarter change."

Students: What industries and products do you think are good indicators of future growth?

Adjusting for Real GDP

Nominal GDP is adjusted to eliminate the impact of inflation and show "real" growth.  Each month, the BEA reports the "price index for gross domestic purchases," a measurement of inflation of prices paid by U.S. residents.  In Q3, this price index increased 1.9 percent, after a 3.3 percent index increase in the second quarter.  Excluding food and energy prices, the price index for gross domestic purchases increased 1.8 percent in the third quarter, after an increase of 2.7 percent in the second quarter. The impact of inflation lessened in Q3 after much greater upward pressure on prices in Q2 2011.

Real GDP Growth by Sector Q3

Remember, the formula for determining GDP is personal consumption expenditures (c), plus private investment (I), plus government spending and investment (G), and net exports (X).

"Real personal consumption expenditures increased 2.3 percent in the third quarter, compared with an increase of 0.7 percent in the second. Durable goods increased 5.5 percent, in contrast to a decrease of 5.3 percent. Nondurable goods decreased 0.6 percent, in contrast to an increase of 0.2 percent. Services increased 2.9 percent, compared with an increase of 1.9 percent. "  Personal consumption expenditures make-up about 70 percent of total GDP.

"Real nonresidential fixed investment increased 14.8 percent in the third quarter, compared with an increase of 10.3 percent in the second. Nonresidential structures increased 12.6 percent, compared with an increase of 22.6 percent. Equipment and software increased 15.6 percent, compared with an increase of 6.2 percent. Real residential fixed investment increased 1.6 percent, compared with an increase of 4.2 percent."

"Real exports of goods and services increased 4.3 percent in the third quarter, compared with an increase of 3.6 percent in the second. Real imports of goods and services increased 0.5 percent, compared with an increase of 1.4 percent."

"Real federal government consumption expenditures and gross investment increased 1.9 percent in the third quarter, the same increase as in the second. National defense increased 4.7 percent, compared with an increase of 7.0 percent. Nondefense decreased 3.8 percent, compared with a decrease of 7.6 percent. Real state and local government consumption expenditures and gross investment decreased 1.4 percent, compared with a decrease of 2.8 percent."

Students: For more details about Q3 2011 real GDP data, see Table 1 of the November 22, 2011 release: www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp3q11_2nd.pdf

Gross National Product

"Real gross national product -- the goods and services produced by the labor and property supplied by U.S. residents -- increased 2.1 percent in the third quarter, compared with an increase of 2.2 percent in the second. GNP includes, and GDP excludes, net receipts of income from the rest of the world, which increased $3.5 billion in the third quarter after increasing $28.0 billion in the second; in the third quarter, receipts decreased $11.0 billion, and payments decreased $14.5 billion."

GDP vs. GNP

“GDP is the featured measure of production in the U.S. …production by labor and property located in the U.S.”

“GNP measures production by labor and property supplied by U.S. residents in or outside the U.S.”

The key difference between GDP and GNP is where the production too place.

Current-dollar GDP

"Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 4.6 percent, or $168.1 billion, in the third quarter to a level of $15,180.9 billion. In the second quarter, current-dollar GDP increased 4.0 percent, or $145.0 billion."

The current estimate of the U.S. GDP is just over $15 billion - $15,180,900,000,000.

Students:  $15,180,900,000,000. 

That' was the U.S. nominal GDP in Q3 2011.  Divide that figure by the U.S. population of 312,600,000 to get the U.S. per capita GDP.

Revisions from the "Advance" Estimate for Q3

"The “second” estimate of the third-quarter increase in real GDP is 0.5 percentage point, or $15.0 billion, lower than the advance estimate issued last month, primarily reflecting downward revisions to private inventory investment, to nonresidential fixed investment, and to personal consumption expenditures that were partly offset by a downward revision to imports."

Nominal (current dollar) GDP vs. Real (constant dollar) GDP

Figure 2, below, shows the nominal (current door) and real (constant dollar) U.S. gross domestic product.  Note the real GDP decreases in 2008 and 2009, reflecting the recession.

 

Figure 2:  Current and Constant  Dollar GDP
Years 2000 to Q3 2011
(U.S. Dollars)
Year Current
Dollar
GDP
Constant Dollar
"Real" GDP
2000 9,951.5 11,226.0
2001 10,286.2 11,347.2
2002 10,642.3 11.553.0
2003 11,142.1 11.836.4
2004 11,853.3 12.246.9
2005 12,623.6 12.623.0
2006 13,377.2 12.958.5
2007 14,028.7 13.206.4
2008 14,291.5 13.161.9
2009 13,939.0 12.703.1
2010 14,526.5 13.088.0
2011 (Q3) 15,180.9 13.337.8


Students:  Can you see the impact of changes in the price level on the determination of real GDP?

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 growth, 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 GDP fell just lightly in 2008, primarily in Q4,and fell significantly in 2009, reflecting the depth of the recession.

In September,2010, the NBER committee announced, "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."  The recession ended 15 months prior to the NBER announcement.  It took this long period for the NBER to adequately determine that economic conditions had turned positive.  Still, some suggest that the U.S. has not adequately recovered and that the recession continues or will recur.

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 3, below, illustrates a "typical" business cycle, with periods of expansion, peak, contraction, and trough.

figure 3

Students:  Do you see the four stages of the business cycle: trough, expansion, peak, and contraction?

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 of leading indicators (LEI) 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 Leading Economic Index® (LEI) for the U.S. increased 0.9 percent in October to 117.4 (2004 = 100), following a 0.1 percent increase in September, and a 0.3 percent increase in August." [Conference Board "Global Business Cycle Indicators, November 18, 2011": www.conference-board.org/data/bcicountry.cfm?cid=1 ]

Says Ataman Ozyildirim, economist at The Conference Board: “The October rebound of the LEI — largely due to the sharp pick-up in housing permits — suggests that the risk of an economic downturn has receded. Improving consumer expectations, stock markets, and labor market indicators also contributed to this month’s gain in the LEI as did the continuing positive contributions from the interest rate spread. The CEI also rose somewhat, led by higher industrial production and employment.”

Says Ken Goldstein, economist at The Conference Board: “The LEI is pointing to continued growth this winter, possibly even gaining a little momentum by spring. The lack of confidence has been the biggest obstacle in generating forward momentum, domestically or globally. As long as it lasts, there is a glimmer of hope.”

"The Conference Board Coincident Economic Index® (CEI) for the U.S. increased 0.2 percent in October to 103.5 (2004 = 100), following no change in September and August."  

"The Conference Board Lagging Economic Index® (LAG) increased 0.6 percent in October to 110.9 (2004 = 100), following a 0.1 percent increase in September, and a 0.2 percent increase in August."

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. 

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 (%)

Revisions from the "Advance" Estimate for Q3

"The “second” estimate of the third-quarter increase in real GDP is 0.5 percentage point, or $15.0 billion, lower than the advance estimate issued last month, primarily reflecting downward revisions to private inventory investment, to nonresidential fixed investment, and to personal consumption expenditures that were partly offset by a downward revision to imports."

Corporate Profits and Corporate Tax Revenues

The BEA also reports on corporate profits and taxes monthly. "Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $39.8 billion in the third quarter, compared with an increase of $61.2 billion in the second quarter." For information about corporate profits and tax revenues in Q3 2011, go to the last section of the November 22, 2011 BEA announcement.  www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Students: Is an increase in corporate profits is a good sign for the economy?

CONCLUSION

Continued growth is critical for the U.S. economy.   The latest estimate of Q3 2011 real GDP growth was less than the advance estimate made in October, but greater than the final estimate for Q2.

What can be done to stimulate growth?

Current Economic Policy Goals

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 is the total amount of goods and services demanded in the economy at a given overall price level and in a given time period. It is represented by the aggregate-demand curve, which illustrates the relationship between price levels and the quantities of output that are demanded. Aggregate demand can also be called total spending.  

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) is intended to do just that. The U.S. government’s Recovery.Gov web site reports that between October 1 and December 31, 2009, stimulus programs created 608,317 new jobs.

For more information about the goals and impact of stimulus programs, go to Recovery.Gov ,  the U.S. government’s official website providing easy access to data related to Recovery Act spending.

ASSESSMENT ACTIVITY

Next, answer the essay question on the below interactive notepad.

Short Answer Essay Question:

1. If gross domestic product increases by 10 percent over a year, are we better off? Why or why not?
 

EXTENSION ACTIVITY

The Bureau of Economic analysis also releases data on personal income and spending each month.  This report includes monthly data on U.S. personal income, disposable income, and personal consumption expenditures.

Personal Income and Outlays: October 2011

Released November 23, 2011

"Personal income increased $48.1 billion, or 0.4 percent, and disposable personal income (DPI) increased $30.2 billion, or 0.3 percent, in October, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $8.2 billion, or 0.1 percent. In September, personal income increased $15.5 billion, or 0.1 percent, DPI increased $7.8 billion, or 0.1 percent, and PCE increased $74.5 billion, or 0.7 percent, based on revised estimates." 

"Real disposable income increased 0.3 percent in October, in contrast to a decrease of 0.1 percent in September. Real PCE increased 0.1 percent, compared with an increase of 0.5 percent."

Link: www.bea.gov/newsreleases/national/pi/pinewsrelease.htm

One key data point is real disposable personal income (DPI) - the amount of income people have to actually spend.