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 "advance" estimate of real GDP released on October 29, 2009, for the third quarter (July - September) of 2009. 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.
- 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.
NEWS FLASH! October 29, 2009. U.S. real gross domestic product increased 3.5 percent in the third quarter or 2009, the first increase in real GDP since a 1.5 percent increase in the second quarter of 2008. Has the economic recovery begun? Is the recession over? What does the increase in real GDP tell us about the economic future? Let's see.
U.S. Bureau of Economic Analysis, Advance Estimate of U.S. Gross Domestic Product Growth: Third Quarter 2009
Released Thursday, October 29, 2009
"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 3.5 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent."
Remember, this is the "advance" or first of three monthly estimates of third quarter real GDP growth. The report explains, "The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency. The "second" estimate for the third quarter, based on more complete data, will be released on November 24,2009."
The increase in Q3 real GDP follows a recent string of quarterly decreases. The chart below shows the reported real GDP growth rates in 2008 and 2009. Note: The National Bureau of Economic Research "Business Cycle Dating Committee" determined that the current recession began in December of 2007. Figure 1, below, shows the rates of change in U.S. real GDP for the previous seven quarters. The NBER declared a recession despite the 1.5 percent growth in Q2 2008. The Q3 2009 growth may or may not mean that the recession is over. The NBER will assess the meaning of the recent GDP growth and other data, such payroll employment, to determine the real direction of the business cycle. When the recession is over, the NBER will let us know.
Figure 1: Real GDP Growth by Quarter
|Q3||2009||+3.5% (advance est.)|
|*The GDP percent changes are based on chained 2005 dollars|
You be the NBER! What evidence will convince you that the recession is over:
- Confirmation in November and December that Q3 saw real GDP growth?
- One more quarter (Q4) of real GDP growth?
- An increase in payroll employment next month or the month after?
- A decline in the unemployment rate? How much?
- An increase in real gross domestic income?
- Some combination of two or more of the above data?
Where Did the Q3 Real GDP Growth Come From?
"The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP,increased."
"The upturn in real GDP in the third quarter primarily reflected upturns in PCE, in private inventory investment, in exports, and in residential fixed investment and a smaller decrease in nonresidential fixed investment that were partly offset by an upturn in imports, a downturn in state and local government spending, and a deceleration in federal government spending."
"Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change. Final sales of computers subtracted 0.11 percentage point from the third-quarter change in real GDP after subtracting 0.04 percentage point from the second-quarter change."
Did the Q3 increase automobile sales resulting from the "Cash for Clunkers" program work? The numbers say that "Cash for Clinkers" increased consumer demand for automobiles - a very significant increase for Q2. But, will automobile sales fall in Q4? Will the increase in consumer demand for automobiles continue if the government subsidy program is not available?
A Quick Review: The components of the measurement of GDP are:
GDP = C (personal consumption expenditures)
+ I (net private investment)
+ G (government spending)
+ X (net exports/exports minus imports)
Figure 2, below, shows the categories of U.S. GDP for the last four quarters (Q4 2008 to Q3 2009). Notice how the percentage of GDP that comes from personal consumption expenditures has increased. Notice also that the percentage of GDP coming from net private investment has decreased. PCE increased as a percentage of the total only because of the very significant decline in investment. A smaller loss from negative net exports and increased government spending (stimulus) have also contributed to the growth of GDP.
Figure 2: Percentage Shares of Gross Domestic Product
Q4 2008 to Q3 2009
|Spending Category||2008 IV||2009 I||2009 II||2009 III|
|Gross Domestic Product||100.0||100.0||100.0||100.0|
|Personal Consumption Expenditures||9.8||70.4||70.7||71.0|
|Gross Private Domestic Investment||14.1||11.9||11.0||11.0|
|Equipment and Software||7.1||6.4||6.3||6.3|
|Change in Private Inventories||-0.3||-0.9||-1.2||-1.0|
|Net Exports of Goods and Services||-4.1||-2.7||-2.4||-2.7|
|Government Consumption and Gross Investment||20.3||20.3||20.7||20.7|
|State and Local||12.5||12.5||12.7||12.5|
Figure 3, below, shows the monthly changes in real GDP from 1990 through Q3 2009. Note the 1990-91 and 2001 recessions with periods of negative GDP growth.
Gross Domestic Purchases
The price index for gross domestic purchases, which measures prices paid by U.S. residents,increased 1.6 percent in the third quarter, compared with an increase of 0.5 percent in the second. According to the BEA's online glossary, gross domestic purchases are "The market value of goods and services purchased by U.S. residents, regardless of where those goods and services were produced. It is gross domestic product (GDP) minus net exports of goods and services. Equivalently, it is the sum of personal consumption expenditures (PCE), gross private domestic investment, and government consumption expenditures and gross investment."
"Excluding food and energy prices, the price index for gross domestic purchases increased 0.5 percent in the third quarter, compared with an increase of 0.8 percent in the second."
"Real personal consumption expenditures increased 3.4 percent in the third quarter, in contrast to a decrease of 0.9 percent in the second. Durable goods increased 22.3 percent, in contrast to a decrease of 5.6 percent. The third-quarter increase largely reflected motor vehicle purchases under the Consumer Assistance to Recycle and Save Act of 2009 (popularly called, “Cash for Clunkers” Program). Nondurable goods increased 2.0 percent in the third quarter, in contrast to a decrease of 1.9 percent in the second. Services increased 1.2 percent, compared with an increase of 0.2 percent."
"Real nonresidential fixed investment decreased 2.5 percent in the third quarter, compared with a decrease of 9.6 percent in the second. Nonresidential structures decreased 9.0 percent, compared with a decrease of 17.3 percent. Equipment and software increased 1.1 percent, in contrast to a decrease of 4.9 percent. Real residential fixed investment increased 23.4 percent, in contrast to a decrease of 23.3 percent."
"Real exports of goods and services increased 14.7 percent in the third quarter, in contrast to a decrease of 4.1 percent in the second. Real imports of goods and services increased 16.4 percent, in contrast to a decrease of 14.7 percent."
Real federal government consumption expenditures and gross investment increased 7.9 percent in the third quarter, compared with an increase of 11.4 percent in the second. National defense increased 8.4 percent, compared with an increase of 14.0 percent. Nondefense increased 6.8 percent, compared with an increase of 6.1 percent. Real state and local government consumption expenditures and gross investment decreased 1.1 percent, in contrast to an increase of 3.9 percent.
The change in real private inventories added 0.94 percentage point to the third-quarter change in real GDP after subtracting 1.42 percentage points from the second-quarter change. Private businesses decreased inventories $130.8 billion in the third quarter, following decreases of $160.2 billion in the second quarter and $113.9 billion in the first.
Real final sales of domestic product -- GDP less change in private inventories -- increased 2.5 percent in the third quarter, compared with an increase of 0.7 percent in the second.
Disposition of Personal Income
According the BEA, "Current-dollar personal income decreased $15.5 billion (0.5 percent) in the third quarter, in contrast to an increase of $19.1 billion (0.6 percent) in the second."
"Personal current taxes increased $4.8 billion in the third quarter, in contrast to a decrease of $119.1 billion in the second. The quarterly pattern of taxes reflected a much smaller decrease in federal withheld income taxes in the third quarter, based on the quarterly pattern of wages and salaries and a leveling off of the effects on withholding rates from the Making Work Pay Credit provision of the American Recovery and Reinvestment Act of 2009."
"Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent) in the second. Real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent."
"Personal outlays increased $148.2 billion (5.8 percent) in the third quarter, compared with an increase of $8.2 billion (0.3 percent) in the second. Personal saving -- disposable personal income less personal outlays -- was $364.6 billion in the third quarter, compared with $533.1 billion in the second. The personal saving rate -- saving as a percentage of disposable personal income -- was 3.3 percent in the third quarter, compared with 4.9 percent in the second. For a comparison of personal saving in BEA’s national income and product accounts with personal saving in the Federal Reserve Board’s flow of funds accounts and data on changes in net worth, go to "Comparison of Personal Saving in the National Income and Product Accounts with Personal Saving in the Flow of Funds Accounts ."
"Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 4.3 percent, or $150.3 billion, in the third quarter to a level of $14,301.5 billion. In the second quarter, current-dollar GDP decreased 0.8 percent, or $26.8 billion."
Q3 current dollar GDP increased by 4.3 percent and the real GDP increased by just 3.5 percent. What's the difference? Real GDP is adjusted for a change in the price level - or, the amount of inflation. The real GDP data is chained to the 2005 price level. The current dollar GDP of $14,301.5 billion is just $13,014.0 billion in "2005 dollars." Measuring the "real" GDP growth is a more meaningful measurement of the health of the economy.
The BEA noted in the October 29 announcement that the "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."
The determination of real GDP from the current dollar GDP was impacted by a change in the price level - as measured by the price index for gross domestic product. During the quarter, the price level increased by 1.6 percent. The reported change in the measurement of output produced at the higher price level has to be increased to reflect constant prices.
This illustrates the difference between nominal (current dollar) and real (constant dollar) GDP. In a period of inflation, the nominal GDP figure may overstate the level of output. It may be that the same number of goods were produced, but at higher prices. Thus, the basic GDP measurement, number of goods times their prices, would show a bigger GDP number. In this case, the price level dropped. Even if the same number of goods and services had been produced, the nominal GDP measurement would have decreased. The change in GDP measurement has to be adjusted upward to represent constant prices.
What do we know about the accuracy of GDP?
The quarterly GDP estimates are made three times - what the BEA calls "vintages." The BEA web page "frequently Asked Questions" section explains. "Early vintages of the GDP estimates are based on partial and incomplete source data. Subsequent GDP estimates incorporate increasingly comprehensive and improved source data. Periodically, BEA conducts studies of reliability. In these studies, reliability is defined as whether the successive vintages of GDP estimates present a consistent, general picture of the economy. The most recent reliability study found (as have previous studies) that the early estimates of GDP present a useful picture of economic activity. They consistently indicate whether growth is positive or negative, whether growth is accelerating or decelerating, whether growth is high or low relative to the trend, and where the economy is in relation to the business cycle. In addition, the latest study found that the average revisions to GDP are small and positive, indicated a tendency toward upward revisions, and found that the GDI estimates have not contained information that would have improved the prediction of future revisions to GDP growth." The BEA feels that the GDP estimates are reasonably accurate.
When asked if the GDP revisions tend to revise the estimates upward, the BEA replies, "Average revisions from the current quarterly estimates—advance, preliminary, and final—to the latest available estimates are not significantly different from zero. That is, even though GDP revisions are non-zero, they are “unbiased.” In other words, on average they neither raise nor lower GDP growth."
"Most GDP revisions result from the incorporation of new or revised source data that were not available at the time of the earlier estimates. In addition, annual revisions to quarterly estimates include the effects of periodic improvements in estimation methods that are necessary to keep the GDP attuned to the changing economy. Methodological improvements typically are put in place as part of once-every-five-year “comprehensive” GDP revisions. The most recent such revision, in 2003, yielded long-run growth rates of current-dollar and real GDP, measured from 1930-2002, that were virtually the same as the pre-revision growth rates."
Cash for Clunkers
The October 29 BEA announcement included this data about automobile sales. "Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change." Another comment referred to the Consumer Assistance to Recycle and Save Act of 2009 (Cash for Clunkers) auto purchase subsidy program. A BEA comment on its "Frequently Asked Questions" web page clarified the impact of the program in answering this question:
"The federal CARS program (popularly called "cash for clunkers"), which began in July 2009 and ended on August 24, 2009, provides a credit of $3,500 or $4,500 for customers who purchase a qualifying new, more fuel efficient auto or light truck from a participating dealer when they trade in a qualifying less fuel efficient auto or light truck. The credit is applied by the dealer to the customer's purchase, after which the dealer is reimbursed by the federal government. The impact of this program will be reflected in several components of the NIPAs."
"For sales to households, the discounted value of the sale will be reflected in current-dollar personal consumption expenditures (PCE). The effects of the discount and other price changes will be removed in the calculation of real (that is, price-adjusted) PCE. The payment to sellers will be recorded as a subsidy (which is like a negative sales tax). For sales to businesses, the value will be reflected in private fixed investment (PFI)."
"The sales of new motor vehicles under the CARS program will be reflected in the source data underlying BEA's motor vehicles estimates; specifically, calculations of unit sales of new autos and new light trucks by model from Ward's Automotive Reports and of the average vehicle price (after rebates and concessions) by model for new autos and for new light trucks from J.D. Power and Associates."
"The following is a simplified example of how a transaction under the CARS program will be reflected in the NIPAs: Suppose a household purchases a new auto under the CARS program and pays a negotiated price of $20,000 less a rebate of $3,500, for a transaction price of $16,500. The purchase of the new auto will be included in PCE. The valuation for current-dollar PCE is the net price paid by the household after the rebate-which is $16,500, the value of the transaction for current-dollar PCE."
"On the income side of the accounts, assume the dealer receives $20,000-that is $16,500 from the consumer and $3,500 from the federal government. Suppose that the $20,000 is distributed to the factors of production as follows: $15,000 to compensation of employees, $1,000 to taxes on production and imports(for sales taxes), and the remaining $4,000 to operating surplus. Then the transaction will be reflected in gross domestic income as follows: Compensation of employees ($15,000), plus taxes on production and imports ($1,000), less subsidies (-$3,500), plus operating surplus ($4,000), which equals $16,500, the same as on the expenditure side of the accounts."
"Note that if the purchase were made by a business instead of by a household, it would be included in PFI. If the vehicles that are sold under the program represent a drawdown of inventories or additional imports, the increases in PCE and PFI would be partly offset by a decrease in inventories or an increase in imports. To the extent that the purchases represent additional domestic production, they would add to real GDP. Current-dollar GDP would increase if the increase in quantity produced is larger than the decrease in price."
The October 29, 2009 BEA report showed the first increase in U.S. real GDP since Q2 2008. Perhaps the stimulus programs working. Clearly, the "Cash for Clunkers" program has had, at least, a short term impact on consumer spending and growth. As the bulk of federal government stimulus programs are implemented, will it be enough to sustain growth and bring the economy back to a healthy state.
Some macroeconomics problems continue. U.S. unemployment remains at nearly ten percent. Each month the U.S. continues to lose non-farm payroll employment (-263,000 in September.) Credit markets have not yet recovered and lending to individuals and small businesses continues to be weak.
Is this one report of real GDP growth the beginning of the end of the recession or a short-term phenomenon.
Watch for the Bureau of Labor Statistics report on employment and unemployment in October (released November 18) and the second, possibly revised, BEA announcement of Q3 real GDP growth released on November 24, 2009.
Next, answer the essay question below on the interactive notepad.
1. If gross domestic product increases by 10 percent over a year, are we better off? Why or why not?
The U.S. Central Intelligence Agency (CIA) “World Factbook” ranks the nations of the by various economic measures, including gross domestic product. The “top ten” nations in the current edition are listed below. NOTE: The CIA GDP data is reported using “purchasing power parity” a process that determines the relative values of two currencies. It equates the purchasing power of various nations’ currencies and lists them as equivalent to U.S. dollars..
|Rank||Country||Per Capita GDP|
|10||United States||$46,900||2008 est.|
In terms of total size of GDP, the U.S. ranks second, just behind the European Union nations’ total:
|Rank||Country||Per Capita GDP|
|1||European Union||$14,910,000,000,000||2008 est.|
|2||United States||$14,260,000,000,000||2008 est.|
|8||United Kingdom||$2,226,000,000,000||2008 est.|
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?
Choose one nation. Summarize what you perceive is that nation’s “standard of living,” according to its per capita GDP and other measures of social welfare.