This lesson focuses on the second estimate of U.S. real gross domestic product for the fourth quarter (Q4) of 2012, as reported by the U.S. Bureau of Economic Analysis (BEA) on February 28, 2013. The current data and historical GDP 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.
Current Key Economic Indicatorsas of February 6, 2015
The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.4% in December on a seasonally adjusted basis. The gasoline index fell 9.4% and was the main cause of the decrease in the seasonally adjusted all items index. The all items index increased 0.8% over the last 12 months, although the core inflation rate (less food and energy) did not change in December.
The unemployment rate rose to 5.7% in January of 2015, according to the Bureau of Labor Statistics release of Feb. 6, 2015. Total nonfarm employment rose by 257,000. Job gains were particularly strong in retail trade, construction, health care, financial activities, and manufacturing.This is the second month in a row that posted gains in construction and manufacturing.
Real GDP increased 2.6% in the fourth quarter of 2014, according to the advance estimate released by the Bureau of Economic Analysis. Consumer spending drove growth due to the reduction in gas prices, while a decrease in government expenditures was the most significant drag on growth. Third quarter growth was 5%.
In its January 28, 2015, statement, the FOMC cited the continued growth of the labor market, increased household and business spending, and below-target inflation as indicators of an economy that continues to recover. They expect below-target inflation to rise as oil prices and other "transitory" effects diminish. The statement reaffirmed the FOMC intention to keep the federal funds rate at its current low level. Notably, the FOMC added international variables to its list of factors to monitor for the timing of a rate increase.
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. GDP is measured quarterly and each quarter's data is reported over the following three months.
This lesson focuses on the BEA's second estimate of real GDP growth for the fourth quarter (Q4) 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.
[Note to teachers: During the second semester of the 2012-2013 school year (January-May), EconEdLink will publish four Focus on Economic Data lessons on "U.S. Real GDP Growth." Real GDP data is announced three times for each fiscal quarter. For Q4 2012, the first estimate was made in January. The second estimate was made in February (THIS LESSON). The third estimate for Q4 will be made in March, 2013.
[NOTE: GDP data reports lag the reporting period - the fiscal quarter. The current estimate is the second estimate for Q4 2012. Each of the three estimates for a quarter will include more comprehensive data and may modify the growth rate reported earlier].
[NOTE: The BEA previously used the terms "advance, preliminary and final" to identify the three quarterly real GDP estimates. The terms "first, second and third" have replaced the previous announcement language.]
Each Real GDP lesson will provide the most up-to-date data and focus on some specific topics or issues related to GDP:
- January 30, 2013 (first estimate for Q4 2011): How to read the data, real vs. nominal, and how the data is collected
- February 28, 2013 (second estimate for Q4 2011): Factors influencing the change in GDP, revisions, and seasonal adjustment
- March 28, 2013 (third estimate for Q4 2011): Business cycles and indicators of future growth or decline.
- April 26, 2013 (first estimate for Q1 2012): More details of GDP U.S. regional growth and international comparison. Year-end summary - 2011.
- Real GDP Growth. BEA second estimate of real GDP growth for Q4 2012. www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_3rd.pdf www.bea.gov/newsreleases/national/gdp/2013/gdp4q12_2nd.htm
Measuring the Economy: A Primer on GDP and the National Income and Product Accounts: This BEA article introduces new users to the basics of U.S. national income and product accounts.
Taking the Pulse of the Economy: Measuring GDP: This article discusses the importance of measuring GDP.
Overview of the U.S. Economy: Perspective from the BEA Accounts: This page provides an overview of current economic data.
Global Business Cycle Indicators: This site produced by The Conference Board, provides business cycle indicators for 11 countries around the world.
NBER determination of the December 2008 Peak in Economic Activity: This is the NBER recession announcement made on December 1, 2008.
NBER determination of the trough and the end of the most recent recession in June, 2009.
- Kahn Academy video: "Parsing Gross Domestic Product," www.khanacademy.org/finance-economics/macroeconomics/v/parsing-gross-domestic-product
- Kahn Academy video: "Components of GDP," www.khanacademy.org/finance-economics/macroeconomics/v/components-of-gdp
- Kahn Academy video: "Real GDP and Nominal GDP," www.khanacademy.org/finance-economics/macroeconomics/v/real-gdp-and-nominal-gdp
- Council for Economic Education "Virtual Economics" video: "Gross Domestic Product (GDP)," www.econedlink.org/interactives/index.php?iid=204
Key Economic Indicatorsas of February 28, 2013
On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers was unchanged in January, as it was in December. The index for all items less food and energy rose 0.3 percent in January after rising 0.1 percent in December.
Total nonfarm payroll employment increased by 157,000 in January, and the unemployment rate was essentially unchanged at 7.9 percent. Retail trade, construction, health care, and wholesale trade added jobs over the month.
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 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent.
The FOMC decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
Good News! Bad News!
The good news: The second estimate of U.S. real GDP growth in the fourth quarter of 2012 was a complete reversal of the negative first estimate.
The bad news: The first estimate was a 0.1 percent decrease on real GDP and the second estimate was just a 0.1 percent increase. A reversal yes, but not much!
On February 28, 2013, the U.S. Bureau of Economic Analysis announced the second estimate of U.S. real gross domestic product growth for the fourth quarter (October-December) of 2012.
National Income and Product Accounts
Gross Domestic Product, 4th quarter 2012 and annual 2012 (second estimate)
Released: February 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 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent."
[Note to Teachers and Students: Unless otherwise cited, the quoted sections of this lesson are from the BEA's February 28, 2013, "Gross Domestic Product, 4th quarter 2012 and annual 2012" announcement. www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm[
The BEA explained the change from the first to the second estimate.
"The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, real GDP declined 0.1 percent. The upward revision to the percent change in real GDP is smaller than the average revision from the advance to second estimate of 0.5 percentage point. While today’s release has revised the direction of change in real GDP, the general picture of the economy for the fourth quarter remains largely the same as what was presented last month."
In other words, the estimate of GDP, whether it is negative 0.1 percent or positive 0.1 percent is still not very good, and the growth of the U.S. economy seems to be weakening. The Q3 2013 final estimate of real GDP growth was 3.1 percent growth.
[Teacher Note: Ask your students: What could be the consequences of such slow GDP growth? (Possible answers: Fewer jobs and income. Less investment if producers do not anticipate profits. Fewer tax revenues for governments]
Read the entire text of the February 28, 2013, BEA announcement 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 second estimate for Q4 2012. The first estimate for Q4 2012 was a growth rate of - 0.1 percent. This was an upward revision of the initial Q4 2013 real GDP growth rate. URL: www.bea.gov/newsreleases/national/gdp/2013/gdp4q12_2nd.htm Real GDP Growth
Was the First GDP Estimate for Q4 2013 “Wrong”?
[Note to Teachers: The second estimate for Q4 2013 was slightly higher than the previous estimate made in January. Ask your students if this seems to be good news. Remind students that quarterly estimates often vary over the three reporting months. You can access past GDP announcements at ' ]
[Note to Teachers: One benchmark used to assess the "health" of the economy is the annual rate of GDP growth. The CEE lesson "Economic Misery and Presidential Elections" uses a 3.0 percent growth rate as a determinant of an adequate growth rate that influences voters to feel good or bad about the economy and the current administration. This is used along with the "misery Index," consisting of the unemployment and inflation rates. See the lesson in Focus: Understanding Economics in Civics and Government , Council for Economic Education, 2009 (Order # 0662, ISBN: 978-1-56183-662-8) Lesson 8, page 99.]
Where was the GDP growth in Q4 2012?
"The increase (change in size) 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 (slowing of the growth rate) 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."
Figure 1, below, shows graphically the U.S. quarterly real GDP growth rates from 1999 through Q4 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
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
Read the full February 28, 2012, BEA announcement of U.S. real GDP growth at: Real GDP Growth www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm . The BEA breaks down the quarterly growth or decline by sector - personal consumption expenditures (PCE), private investment, government spending, and net exports. Recently, the BEA has highlighted the levels of inventories as factors in determining real GDP growth.
[Note to Teachers: Ask you students what sectors declined in Q4 2012. What sectors grew in Q2 2012? Any surprises?]
The BEA also breaks down the GDP data by sectors. Go to www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp4q11_2nd.pdf . Scroll down the announcement to the "Tables" to see recent sector and industry group GDP data.
Q4 2012 Real GDP Growth Highlights
- U.S. Real gross domestic product increased 0.1 percent in Q4.
- Real personal consumption expenditures increased 2.1 percent in Q4.
- Real non-residential private fixed investment increased 9.7 percent in Q4.
- Real residential fixed investment increased 17.5 percent.
- Real imports of goods and services decreased 4.5 percent
- Real exports of goods and services decreased 3.9 percent
- Real federal government consumption expenditures and gross investment decreased 14.8 percent.
- Real state and local government consumption expenditures and gross investment decreased 1.3 percent.
- The change in real private inventories subtracted 1.55 percentage points from the fourth-quarter change in real GDP.
[Note to Teachers: Students can also look at the detailed GDP Data by Industries to identify how well the key industries in their city or region are doing.]
What was the current-dollar GDP in Q4 2012?
"Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 1.0 percent, or $40.2 billion, in the fourth quarter to a level of $15,851.2 billion. In the third quarter, current-dollar GDP increased 5.9 percent, or $225.4 billion."
[Teacher Note: You may want to explain that $15,851.2 billion is the same as $15.8512 trillion.]
According to the U.S. Census Bureau, the U.S. resident population at the end of 2012 was 315,090,923. (www.census.gov/popest/data/national/totals/2012/index.html ). Given those estimates, the U.S. current dollar per capita real GDP was approximately $50,307. Per capita GDP is the total GDP divided by the population.
Current dollar GDP in Q4 2013 was $15,851,200,000, and real GDP (adjusted for inflation) was $13,656,800,000. This tells us that almost $2.2 trillion of the nominal growth since 1983-85 has resulted from an increase in the price level (inflation). The rest was real or constant dollar growth.
[Note to teachers: Make sure your students are clear about the difference between the nominal (current dollar) GDP and the real (chained dollar) GDP measurements.]
[Note to Teachers: 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:
- Incorporate most complete and reliable source data.
- Provide a more detailed picture of the economy.
- Make improvements to methods used for preparing the estimates.
Figure 2, below, shows the U.S. current dollar and real GDP for the years 2000 through 2012. Note the years when the GDP adjustment was significant and when the adjustment was small (compare the difference between the growth of the nominal and real GDP numbers.
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.
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 ]
2012 Annual GDP Data
"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."
Note; The annual GDP figure differs slightly from the figure for Q4. The annual figure is the amount of the change over the past 12 months. The quarterly (three month period) amounts or changes during that 12 month period may have differed greatly. Thus, the annual change may differ from the change reported for the end of the fourth quarter.
"The increase (dollar value) 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 from state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased."
"The acceleration (rate of change) 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, exports, and nonresidential fixed investment."
Be careful not to look at one quarterly increase or decrease and idnetify it as a trend. Although private investment increased just slightly in Q4, any of the four sectors may have been affected by one-time ot transient events.
"Current-dollar GDP increased 4.0 percent, or $605.8 billion, in 2012 to a level of $15,681.5 billion, compared with an increase of 4.0 percent, or $576.8 billion, in 2011."
[Note to Teachers: Ask your students how they feel about the health of the U.S economy. Is it getting better? Worse? Is such low GDP growth enough when 12 million Americans are still unemployed and many more are underemployed?]
The U.S. real GDP growth rate dropped to just 0.1 percent in Q4 2012, according to the Bureua of Economic Analysis second estimate. This was a significant slow-down from the Q3 growth rate of 3.1 pecent.
In Q3, the U.S. economy was growing at a modest – almost an average - pace. Unfortunately, this growth had not resulted in the creation of enough new jobs to reduce the unemployment rate to anywhere near a normal level. The U.S. unemployment rate remains at over 8 percent). With a slower growqth rate in Q4, the prospects for significant job creation seem negative.
It is generally clear that if unemployment is high, the economy will not be producing at its full or normal output. Since people who are not working, their labor resources are not being used effectively. What is the relationship between unemployment and output?
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 in the coming months.
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 2012).
Note: A nation's GDP at purchasing power parity (PPP) exchange rates is the sum value of all goods and services produced in the country valued at prices prevailing in the United States in the year noted. All figures are equated to U.S. dollars for comparison purposes.
In terms of total size of GDP, the U.S. ranks second, just behind the European Union nations’ total. (Estimates are for year 2011). See the CIA "Guide to Country Comparisons " webpage.
Take a look at the economic data for the world’s nations available from the CIA World Factbook. What does the data tell you about the various nations?
[Teacher Note: Have your students choose one nation. Summarize what they perceive is that nation’s “standard of living,” according to its per capita GDP and other measures of social welfare.]
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