This lesson focuses on the March 26, 2009, final estimate of U.S. real gross domestic product (Real GDP) for the fourth quarter of 2008, 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.

KEY CONCEPTS

Aggregate Demand (AD), Business Cycles, Gross Domestic Product (GDP), Macroeconomic Indicators, Real Gross Domestic Product (GDP)

STUDENTS WILL

  • 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 Indicators

as of May 5, 2013

Inflation

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers decreased 0.2 percent in March after increasing 0.7 percent in February. The index for all items less food and energy rose 0.1 percent in March after rising 0.2 percent in February.

Employment and Unemployment

Total nonfarm payroll employment rose by 165,000 in April, and the unemployment rate was little changed at 7.5 percent. Employment increased in professional and business services, food services and drinking places, retail trade, and health care.

Real GDP

Real gross domestic product increased at an annual rate of 2.5 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent.

Federal Reserve

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee 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...

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.  Understanding the level and rate of growth of the economy's output (GDP) helps to better understand employment trends, the health of businesses, and consumer well-being.

This "Focus on Economic Data" lesson focuses on the BEA “final” estimates released March 26, 2009, for the fourth quarter (October, November and December) of 2008.

[Note to teachers: During the second half of the school year (January-June), 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 2008, the advance announcement was made in January, the preliminary report was made in February, and the final Q4 2008 report is this report, made in March. The advance report for Q1 of 2009 will be made in April.

Note that the GDP data reports lag the reporting period. Each of the three announcements for a quarter will include more comprehensive data and may modify the growth rate reported earlier. Each Real GDP lesson will provide the most up-to-date data and focus on some specific topics or issues related to GDP:

  • January (advance Q4 2008): How to read the data, real vs. nominal, and how the data is collected.
  • February (preliminary Q4 2008): Factors influencing the change in GDP, revisions, and seasonal adjustments.
  • March (final Q4 2008): Business cycles and indicators of future growth or decline.
  • April (advance Q1 2009): Year-end summary and current issues.]

MATERIALS


Key Economic Indicators

as of March 26, 2009

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in February, before seasonal adjustment. The February level of 212.193 (1982-84=100) was 0.2 percent higher than in February 2008.

Employment and Unemployment

Non-farm payroll employment continued to fall sharply in February (-651,000), and the unemployment rate rose from 7.6 to 8.1 percent. Payroll employment has declined by 2.6 million in the past 4 months. In February, job losses were large and widespread across nearly all major industry sectors.

Real GDP

U.S. Real gross domestic product decreased at an annual rate of 6.3 percent in the fourth quarter of 2008 (final estimate). In the third quarter, real GDP decreased 0.5 percent.

Federal Reserve

The Federal Open Market Committee maintained the target range for the federal funds rate at 0 to 1/4 percent. In addition, the Fed committed over $1 trillion in new programs to "support mortgage lending and housing markets.

PROCESS

The March 26, 2008, BEA Announcement: Real Gross Domestic Product:

"Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 6.3 percent in the fourth quarter of 2008, (that is, from the third quarter to the fourth quarter), according to final estimates released by the Bureau of Economic Analysis.  In the third quarter, real GDP decreased 0.5 percent."

U.S. real gross domestic product (real GDP) decreased in the fourth quarter (Q4) of 2008 at a slightly greater rate than the BEA's preliminary estimate made in February.  GDP quarterly estimates are made in three consecutive months following each quarter.  Each estimate is based on more recent and/or accurate data. The BEA explained, "The GDP estimates released today are based on more complete source data than were available for the preliminary estimates issued last month. In the preliminary estimates, the decrease in real GDP was 6.2 percent."

The BEA announcement attributed the decrease in real GDP in the fourth quarter to "negative contributions from exports, personal consumption expenditures, equipment and software, and residential fixed investment that were partly offset by a positive contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased."

"Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third. The largest contributors were a downturn in exports and a much larger decrease in equipment and software. The most notable offset was a much larger decrease in imports."

Providing more detail, the BEA added, "Final sales of computers subtracted 0.02 percentage point from the fourth-quarter change in real GDP after subtracting 0.01 percentage point from the third-quarter change.  Motor vehicle output subtracted 2.01 percentage points from the fourth-quarter change in real GDP after adding 0.16 percentage point to the third-quarter change."

The chart below shows the level of U.S. nominal (current dollar) and real GDP for the past two years.  Note the increases in early 2007 and the first decrease in Q4 of 2007.  GDP increased in the first half of 2008 and the current trend of declines began in the second half of 2008.    
 

Year Quarter Nominal GDP Real GDP
2007 Q1

13,510.9

11,357.8
Q2 13,737.5 11,491.4
Q3 13,950.6 11,625.7
Q4 14,031.2 11,620.7
2008 Q1 14,150.8

11,646.0

Q2 14,294.5 11,727.4
Q3 14,412.8 11,712.4
Q4 14,200.3 11,522.1

Figure 1 shows the changes in real GDP from 2009 to the present.  Note the "pattern" of increases (peaks) and decreases (troughs) of the business cycles.  The three troughs with low points below zero are the recessions of 1990-91, 2001, and 2008.  You will notice that not all troughs reach below the level of zero - declines in the rate of growth, but still reflecting positive growth.


GDP Figure1

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.  Recessions, a "significant decline in economic activity spread across the economy, lasting more than a few months," are identified by the National Bureau of Economic Research "Business Cycle Dating Committee."  In addition to real GDP, the key measurements in the determination of a recession are real income, employment, industrial production, and wholesale-retail sales. 

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 slightly in 2007Q4, rose slightly in 2008Q1, rose again in 2008Q2, and fell slightly in 2008Q3…the currently available estimates of quarterly aggregate real domestic production do not speak clearly about the date of a peak in activity.”
  • 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.”

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


GDP Figure 2

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 announced March 19, 2009.

"The Conference Board Leading Economic Index™ (LEI) for the U.S. decreased 0.4 percent, The Conference Board Coincident Economic Index™ (CEI) decreased 0.4 percent and The Conference Board Lagging Economic Index™ (LAG) decreased 0.4 percent in February. 

"The Conference Board LEI for the U.S. declined in February, following a slight increase in January. The monthly increase for December was revised to a small decline, while January's monthly increase was revised lower, due mainly to data revisions in manufacturers' new orders and real money supply. Between August 2008 and February 2009, the index fell 2.1 percent (a -4.1 percent annual rate), faster than the decline of 1.6 percent (a -3.1 percent annual rate) for the previous six months. In addition, the weaknesses among the leading indicators have remained widespread in recent months.

The Conference Board CEI for the U.S. fell again in February, driven by continued declines in employment and industrial production. Between August 2008 and February 2009, this index of current economic activity dropped 3.1 percent (a -6.1 percent annual rate), a much larger fall than the decrease of 0.9 percent (a -1.9 percent annual rate) for the previous six months, and the weaknesses among its components have remained widespread in recent months."

"The Conference Board LAG for the U.S. declined by the same amount as the coincident economic index this month, and as a result, the coincident to lagging ratio was unchanged. Meanwhile, real GDP fell at a 6.2 percent annual rate in the fourth quarter of 2008 (following a decline of 0.5 percent annual rate in the third quarter), the largest quarterly contraction since 1982."

"Amid widespread deterioration among its components, The Conference Board LEI for the U.S. continued the general downward trend that began in July 2007. But, its rate of decline has moderated slightly in recent months. Meanwhile, The Conference Board CEI for the U.S. remains on a downtrend that began in November 2007, with the decline in the index having accelerated in recent months. The six-month decline in the CEI is the largest since 1975. Taken together, the behavior of the composite economic indexes suggests that the economic recession that began in December 2007 will continue in the near term."

For more information on economic indicators, go to the "Business Cycle Indicators Handbook ," produced by the The Conference Board. The leading, coincident and lagging indicators are explained on page 13.

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
  • 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
  • The 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. 

Leading Indicators:

  • 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 

Coincident Indicators:

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

Lagging 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 (%)

More details from the February 2008 real GDP, from the BEA announcement

Real GDP is summarized as the total of four components: personal consumption expenditures, net private investment, government expenditures, and net exports.  In Q4, the results for the four components were:

  • "Real personal consumption expenditures decreased 4.3 percent in the fourth quarter, compared with a decrease of 3.8 percent in the third." 
  • "Real nonresidential fixed investment decreased 21.7 percent, compared with a decrease of 1.7 percent.  Nonresidential structures decreased 9.4 percent, in contrast to an increase of 9.7 percent.  Equipment and software decreased 28.1 percent, compared with a decrease of 7.5 percent.  Real residential fixed investment decreased 22.8 percent, compared with a decrease of 16.0 percent." 
  • "Real exports of goods and services decreased 23.6 percent in the fourth quarter, in contrast to an increase of 3.0 percent in the third.  Real imports of goods and services decreased 17.5 percent, compared with a decrease of 3.5 percent."
  • "Real federal government consumption expenditures and gross investment increased 7.0 percent in the fourth quarter, compared with an increase of 13.8 percent in the third. National defense increased 3.4 percent, compared with an increase of 18.0 percent.  Non-defense increased 15.3 percent, compared with an increase of 5.1 percent.  Real state and local government consumption expenditures and gross investment decreased 2.0 percent, in contrast to an increase of 1.3 percent."
  • "The real change in private inventories subtracted 0.11 percentage point from the fourth-quarter change in real GDP, after adding 0.84 percentage point to the third-quarter change.  Private businesses decreased inventories $25.8 billion in the fourth quarter, following a decrease of $29.6 billion in the third quarter and a decrease of $50.6 billion in the second."

Go to the full BEA News Release of the Final Estimate of U.S. GDP, Fourth Quarter 2008 for a more detailed breakdown of the data by category (Table 1.)

Recent government policy decisions to stimulate 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

ASSESSMENT ACTIVITY

 

Essay Question:

  1. Why does the BEA announce the GDP data for a quarter in three following months (advance, preliminary and final announcements)? [The first of the three monthly estimates is based on new data. Each successive estimate (preliminary and final) is base on newer (concurrent or lagging) and more comprehensive data. Some or all of the lagging indicators may confirm or change the previously made estimates. In some cases, such as what happened in Q3 of 2008, the lagging indicators will adjust data from a previous quarter. Since the real GDP data is very complex and is used for future planning, it is critical that it be accurate and adjusted if appropriate.]

CONCLUSION

The decline in GDP during the fourth quarter of 2008 was broad-based. Only the government expenditures category contributed positively, as government spending replace a small portion of the slowdown in private spending and investment. "Real federal government consumption expenditures and gross investment increased 7.0 percent in the fourth quarter."

The Conference Board's Index of Coincident Indicators for February 2009 (-0.4 percent) was consistent with the downturn identified by the BEA in Q4. "Driven by continued declines in employment and industrial production."

Does this mean that the BEA will find that the contraction continued or deepened when it releases the "advance" estimate of real GDP growth for the first quarter of 2009 (January-March)?  Will the Business Cycle Dating Committee confirm that the recession continues?  Watch for the April BEA announcement.

EXTENSION ACTIVITY

 

Take another look at the list of "Leading Economic Indicators" from the lesson.  Which indicators do you think are the best indicators of the future health of the 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.

Search for "index of leading indicators."

Here is the link to the Conference Board press release on Gloal Business Cycle Indicators .