This lesson focuses on the April 29, 2009, advance estimate of U.S. real gross domestic product (Real GDP) for the first quarter of 2009, 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

Business Cycles, Gross Domestic Product (GDP), Macroeconomic Indicators, Nominal Gross Domestic Product (GDP), 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 “advance” estimates released April 29, 2009, for the first quarter (January, February and March) of 2008.

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.  During the time period of the school second semester, there will be four BEA Real GDP reports:

  • 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. THIS LESSON

[Note to teachers and students: The terms Q1, Q2, etc., refer to quarters of the calendar year. Q1 is January-March. Q2 is April-June.   Q3 is July-September.  Q4 is October-December.   Each reference to a quarter will note the calendar quarter and year. For example, this report is primarily concerned with "Q1 2009."]

MATERIALS


Key Economic Indicators

as of April 29, 2009

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in March (2009), before seasonal adjustment. The index has decreased 0.4 percent over the last year, the first 12 month decline since August 1955.

Employment and Unemployment

Nonfarm payroll employment continued to decline sharply in March (-663,000), and the unemployment rate rose from 8.1 to 8.5 percent. Since the recession began in December 2007, 5.1 million jobs have been lost, with almost two-thirds (3.3 million) of the decrease occurring in the last 5 months."

Real GDP

Real gross domestic product decreased at an annual rate of 6.1 percent in the first quarter of 2009. In the fourth quarter of 2008, real GDP decreased 6.3 percent.

Federal Reserve

The FOMC will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

PROCESS

The 2008-2009 recession continues. An estimated negative 6.1 percent GDP growth for the first quarter of 2009 confirms that the recession that began in December 2007 has not yet ended. Is it getting better or worse? The decline in GDP of 6.1 percent in Q1 2009 was slightly smaller than the decline of 6.3 percent (final estimate) for Q4 2008, but the "advance" estimate for Q1 2009 is subject to revision in May and June. The "advance" estimate for Q4 2008 (reported in January 2009) was just a 3.8 percent decline. The February and March revisions brought the decline in Q4 2008 to -6.3 percent.  

Bureau of Economic Analysis Announcement: Gross Domestic Product, First Quarter, 2009 (Advance)

"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 6.1 percent in the first quarter of 2009, (that is, from the fourth quarter to the first quarter), according to advance estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP decreased 6.3 percent."

The news release added the prospect for revision in the May "preliminary" estimate for Q1.  "The Bureau emphasized that the first-quarter “advance” estimates are based on source data that are incomplete or subject to further revision by the source agency. The first quarter “preliminary” estimates, based on more comprehensive data, will be released on May 29, 2009."

Are things getting better or worse? On a positive note, the BEA release cited an increase in personal consumption expenditures, the largest component of GDP. "The decrease in real GDP in the first quarter primarily reflected negative contributions from exports, private inventory investment, equipment and software, nonresidential structures, and residential fixed investment that were partly offset by a positive contribution from personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, decreased."

"The slightly smaller decrease in real GDP in the first quarter than in the fourth reflected an upturn in PCE for durable and nondurable goods and a larger decrease in imports that were mostly offset by larger decreases in private inventory investment and in nonresidential structures and a downturn in federal government spending... Real personal consumption expenditures increased 2.2 percent in the first quarter, in contrast to a decrease of 4.3 percent in the fourth. Durable goods increased 9.4 percent, in contrast to a decrease of 22.1 percent. Nondurable goods increased 1.3 percent, in contrast to a decrease of 9.4 percent. Services increased 1.5 percent, the same increase as in the fourth. Real nonresidential fixed investment decreased 37.9 percent."

PCE increased in all categories except food (-0.8 percent), housing (-0.01 percent, and transportation (-0.14 percent).  The BEA release cited two key products, both improvements from Q4, "Motor vehicle output subtracted 1.36 percentage points from the first-quarter change in real GDP after subtracting 2.01 percentage points from the fourth-quarter change. Final sales of computers added 0.05 percentage point to the first-quarter change in real GDP after subtracting 0.02 percentage point from the fourth-quarter change."

The BEA release added a footnote about seasonal adjustments and adjustments for inflation.  "Quarterly estimates are expressed at seasonally adjusted annual rates, unless otherwise specified. Quarter-to-quarter dollar changes are differences between these published estimates. Percent changes are calculated from unrounded data and are annualized. “Real” estimates are in chained (2000) dollars. Price indexes are chain-type measures."

Figure 1 shows the quarterly changes in real GDP growth from 1990 to the present.  Note the general "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.  Most cycles simply decline as the rate of growth slows, but still reflect (although smaller) positive growth.  The negative growth of Q4 2008 and Q1 2009 is the most severe downturn since the early 1980s.

GDP Figure 1

Real GDP by Sector, First Quarter 2009

"Real personal consumption expenditures increased 2.2 percent in the first quarter, in contrast to a decrease of 4.3 percent in the fourth. Durable goods increased 9.4 percent, in contrast to a decrease of 22.1 percent.  Nondurable goods increased 1.3 percent, in contrast to a decrease of 9.4 percent. Services increased 1.5 percent, the same increase as in the fourth." Consumers are spending more.

"Real nonresidential fixed investment decreased 37.9 percent in the first quarter, compared with a  decrease of 21.7 percent in the fourth.  Nonresidential structures decreased 44.2 percent, compared with a decrease of 9.4 percent.  Equipment and software decreased 33.8 percent, compared with a decrease of 28.1 percent.  Real residential fixed investment decreased 38.0 percent, compared with a decrease of 22.8 percent." Investment by businesses and households (houses) are slowing at an increased rate.

Real exports of goods and services decreased 30.0 percent in the first quarter, compared with a decrease of 23.6 percent in the fourth. Real imports of goods and services decreased 34.1 percent, compared with a decrease of 17.5 percent." Both imports and exports decreased, but net exports remained a negative number in the determination of U.S. GDP. Net exports are subtracted from GDP.

"Real federal government consumption expenditures and gross investment decreased 4.0 percent in the first quarter, in contrast to an increase of 7.0 percent in the fourth.  National defense decreased 6.4 percent, in contrast to an increase of 3.4 percent.  Nondefense increased 1.3 percent, compared with an increase of 15.3 percent.  Real state and local government consumption expenditures and gross investment decreased 3.9 percent, compared with a decrease of 2.0 percent."  The recent increases in government spending, which had been the only positive component in Q4, reversed in Q1.

Figure 2 shows the value of the sectors of  U.S. GDP in Q1 2009 in current (nominal) dollars and in chained dollars (adjusted for inflation. Note that personal consumption expenditures were, by far, the largest percentage of GDP (almost 70 percent). Private investment was only 11 percent of GDP in Q1, but that component decreased over 24 percent in the last year.   The increase of 2.6 percent of PCE was approximately $379 billion.  The 24 percent decrease in investment was about $370 billion. The increase in consumption was offset by the decrease in investment from Q4 2008 to Q1 2009.

Although imports and exports are a relatively small percentage of the U.S. economy, their decreases show that problems in the United States impact the world economy and foreign economic problems impact the U.S.

Figure 2: U.S. Gross Domestic Product
First Quarter 2009
(Advanced Estimate in $ billions)
  Current Dollars
(nominal)
Chained Dollars
(adjusted for inflation)
Gross Domestic Product 14,075.5 11,340.9
Personal Consumption Expenditures 9,955.7 8,214.2
Private Investment 1,579.8 1,329.8
Net Exports -337.7 -308.4
Government Expenditures 2,877.7 2,073.8
Percent Change from Q1 2008 (final) to Q1 2009 (advance)
Gross Domestic Product -2.6%
Personal Consumption Expenditures -1.2%
Private Investment -24.2%
Exports -11.3%
Imports -16.5%
Government Expenditures 1.7%

The Impact of the Recession

Since the declaration of the current recession by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee in December 2008 (citing that the recession began a year earlier in December 2007), U.S. economic conditions have worsened. GDP growth (despite the popular belief) is not the sole determinant of a recession. The NBER defines a recession this way:

"A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.

The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. This series (data report) reached a peak in December 2007 and has declined every month since then."

Source: Business Cycle Dating Committee, National Bureau of Economic Research, report on “Determination of the December 2007 Peak in Economic Activity ,” December 11, 2008.

What Happens?

Increased unemployment. When consumer or business spending decreases, the demand for labor decreases.  Employment may lag recovery efforts, as it takes time for employers to increase output and create jobs.

Decreasing investment. When firms expect less demand for their goods and services, they will cut costs and not invest in productive capacity. Investment spending decreased almost forty percent in the last quarter. 

Lower stock market prices. If the recession results in lower corporate profits and uncertainty about future values, stock prices may fall. As investors sense a recovery, stock prices may rise and be an indicator of a better economy in the future. Remember, stock prices do not always follow the general economic trends.

Increased government spending and budget deficits. Decreased output and employment leads to lower tax revenues (income tax, sales tax, corporation taxes, etc.). Some government programs, such as unemployment compensation will increase. More government borrowing will mean higher more debt to repay and higher taxes in the future

Lower price level. Reduces spending typically results in less price pressure. The result is a lower rate of inflation.  Greater problems will occur if prices fall – deflation. A recession may put pressure on firms to reduced prices to compete. Lower prices and profits are a disincentive to invest and increase output. 

Look at the following data about the performance of the U.S. economy since the beginning of the current recession (Figure 3). Notice the relationships of real GDP growth, payroll employment (the NBER's key data) and the unemployment rate. CPI data has been included because it is also the subject of monthly "Focus on Economic Data" lessons.

Figure 3: U.S. Economic Data
December 2007-March 2009
                  Real GDP Growth
(Quarterly)
Payroll Employment
Unemployment Rate (CPI-U) Consumer Price Index (%change)
Dec 2007 -0.2 (Q4) 120,000 4.4% 0.3%
Jan 2008   -72,000 4.9% 0.4%
Feb 2008   -144,000 4.8% 0.2%
Mar 2008 0.9 (Q1) -122,000 5.1% 0.4%
Apr 2008   -160,000 5.0% 0.2%
May 2008   -137,000 5.5% 0.5%
June 2008 2.8 (Q2) -161,000 5.6% 0.9%
July 2008   -128,000 5.8% 0.7%
Aug 2008   -175,000 6.2% 0
Sept 2008 -0.5 (Q3) -321,000 6.2% 0
Oct 2008   -380,000 6.6% -0.8%
Nov 2008   -597,000 6.8% -1.7%
Dec 2008 -6.3 (Q4) -681,000 7.2% -0.8%
Jan 2009   -741,000 7.6% 0.3%
Feb 2009   -651,000 8.1% 0.4%
Mar 2009 -6.1 (Q1) -663,000 8.5% -0.1%

What trends do you see in the four data sets?

What generalizations can you make about the trends of the four data sets?

Are the real GDP growth and payroll employment trends related?

Are the real GDP growth and unemployment rate trends related?

Are the payroll employment and unemployment rate trends related?

Is the trend of the CPI-U related to the real GDP growth and payroll employment data?

If you were a member of the NBER "Business Cycle Dating Committee, would you argue that we are in a recession?

.................................................................

1. The data for real GDP growth, employment and unemployment rate significantly worsened (almost continually) since December 2007.

2. As payroll employment decreased, the unemployment rate increased (with few minor) exceptions).

3. As GDP growth slowed and turned negative, the unemployment rate increased and payroll employment decreased.

4. As payroll employment decreased and real GDP decreased, there was little inflation and, at times, short periods of deflation in consumer prices. (Remember, more volatile energy prices are a significant variable in the CPI data.)]

ASSESSMENT ACTIVITY

 Have your students click the start button below to complete an interactive quiz on the GDP lesson.


Essay Question:

1.  What government policies do you think can help to turn around the economy?  How will the policy impact the current economic conditions?

[Students should be able to explain the relationship between the specific policy they recommend (fiscal or monetary) and the impact on employment and output.  Fiscal policies (tax cuts or spending) are intended to put money into people's hands to spend.  Their spending will generate more output and result in more jobs.  Monetary policies are intended to lower borrowing costs and provide liquidity in the economy. Lower borrowing costs should be an incentive for consumers to spend and businesses to invest.]

CONCLUSION

As the economy loses jobs and output, people lose income. As incomes decrease, demand decreases. When the decrease in demand results in more job losses, the economy can spiral downward. The April 29 BEA report notes that "Current-dollar personal income decreased $59.9 billion (2.0 percent) in the first quarter, compared with a decrease of $42.9 billion (1.4 percent) in the fourth."  Many say that the United States (and may other nations) is just entering a recession that will get worse before it gets better. Others sense that we are near, if not at, the bottom. Personal consumption expenditures did increase in the last quarter.

Although consumer spending may have increased, private investment dropped almost forty percent in Q1. Less investment means fewer jobs are being created – either because companies choose not to hire more employees or because businesses have reduced their purchases of tools, vehicles, technology and other means of production. 

The Federal Reserve’s monetary policies have brought the fed funds rate to a historic low – followed by very low mortgage rates and more liquidity in financial markets. The federal stimulus package and other programs – totaling trillions of dollars – have just begun to filter into the economy. The goal of the stimulus is that government spending – creating jobs, putting money into people’s hand and increasing investment – will replace the lost spending.

Will it work? What is the cost?

When governments spend more and tax revenues are down, they incur budget deficits. Somehow, some way, the bills must eventually be paid. A larger public debt will require even larger federal budgets in the future.   Some say the markets can correct themselves – but at what cost? Only those who lived through the Great Depression, now at least eighty years old, have experienced such uncertainty in their lives. For the rest of us, these are new times – after a long period of relatively stable economic growth.

Is government intervention – stimulus, direct control of large banks and automobile manufacturers, and more control of financial markets, the answer? Only time will tell.

EXTENSION ACTIVITY

The Misery Index

In the 1970s, Brookings Institution economist Arthur Okun created the "misery index, combining the unemployment rate and the inflation rate.  Dr. Okun proposed that a period of both high inflation and high unemployment results in significant economic and social costs to the nation.  An increase in the misery index indicates greater problems and a decrease in the index indicates improvement.  One other prevailing theory has been that there is a natural trade-off between unemployment and inflation - the so-called "Phillips Cure."  In theory, the conditions that cause unemployment will reduce inflationary pressure and visa-versa.  When the trade-off does not happen and both unemployment and inflation increase, the economy has more significant problems that traditional policies may not be able to solve.  One key variable that may create conditions of both high (low) inflation and high (low) unemployment is changes in energy prices.

In June, 1980, the misery index reached it highest level in history - 21.98%.  The lowest level for the misery index was 2.97 percent in July 1953.  In April, 2009, despite a high unemployment rate (8.5 percent) the index stands at only 8.7 percent, primarily because the rate of inflation is currently very low.  Imagine the problems many people faced in 1980 when over 10 percent of the labor force was unemployed and they were experiencing a very high rate of inflation at the same time.

Look at the annual data for unemployment and inflation.  When has the "misery index" increased? When has it decreased?

Do you think economic data has impacted recent presidential elections?

Sources: 

CPI Monthly/Annual Data

Unemployment Rate Annual Data  

[NOTE:  There is a lesson in the Council for Economic Education's "Civics and Government: Focus on Economics" teacher guide called "To What Extent Do Economic Conditions Determine the Outcome of Presidential Elections?"  Unit 3: lesson 8.  It compares changes in the misery index to the outcomes of president elections from 1960 to 1992.  Students look at economic data to determine the possible relationship between the health of the economy and election outcomes.]