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 "first estimate" of real GDP released on January 29, 2010, for the fourth quarter (October-December 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.
[NOTE: GDP data reports lag the reporting period - fiscal quarter. The current estimate is for Q4 (October-December, 2009). 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.]
- 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.
"Happy days are here again,
The skies above are clear again
Let us sing a song of cheer again --
Happy days are here again"*
Is it time to sing this old song again? The size of the US. economy increased at an annual rate of 5.7 percent in the fourth quarter of 2009. The economy is growing and prosperity just around the corner. Right? Read more about the Q4 2009 GDP data and decide for yourself.
"Happy Days Are Here Again," by Jack Yellen & Milton Alger (November 1929).
Bureau of Economic Analysis Press Release: Gross Domestic Product: Fourth Quarter 2009 (First Estimate)
"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 5.7 percent in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.2 percent."
"The Bureau emphasized that the fourth-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 fourth quarter, based on more complete data, will be released on February 26, 2010."
Remember, GDP data for a quarter is released three times over three months. Each announcement is made with more data and more analysis. This is the first estimate for Q4 2009. The announcement first comments on the sector trends affecting the overall growth rate estimate. NOTE: These sectors are described later in this lesson.
"The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, exports, and personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, increased."
"The acceleration in real GDP in the fourth quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and an upturn in nonresidential fixed investment that were partly offset by decelerations in federal government spending and in PCE."
Typically, any very significant data for industries are highlighted. For Q4, motor vehicle sales were a highlight. "Motor vehicle output added 0.61 percentage point to the fourth-quarter change in real GDP after adding 1.45 percentage points to the third-quarter change. Final sales of computers subtracted 0.03 percentage point from the fourth-quarter change in real GDP after subtracting 0.08 percentage point from the third-quarter change."
A Footnote from the BEA: "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 (2005) dollars. Price indexes are chain-type measures."
Real GDP data is revised to adjust for the impact of inflation. The mechanism to adjust the data is based on a price index. "The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 2.1 percent in the fourth quarter, compared with an increase of 1.3 percent in the third."
The BEA also notes the difference between the "headline" or total estimate for GDP price index versus the data included in the "core" index that excludes two expenditure groups that typically vary more from month to month - energy and food prices. "Excluding food and energy prices, the price index for gross domestic purchases increased 1.2 per cent in the fourth quarter, compared with an increase of 0.3 percent in the third."
For more information about the difference between the headline and core price indexes, see the recent EconEdLink lessons on the "CPI and Inflation."
The 2008-2009 Recession
In December 2008, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) declared that a recession had begun in the U.S. economy in December 2007. At that time, U.S. output had slowed considerably from the previous quarters. More serious slowing (negative growth) accelerated in Q4 of 2008. Although the NBER's declaration that a recession had begun did not fit the commonly held definition of a recession - two consecutive quarters or negative or no growth - overall economic conditions had deteriorated enough for the NBER to make the decision that a recession had begun. The 2008-2009 bears out the NBER's decision to call a business cycle peak and the beginning of a recession. In addition, the U.S. unemployment rate doubled between January 2008 and November 2009.
Figure 1 shows the rates of change of real GDP from 2007 to the present. If you refer back to the real GDP data reported in January of 2009 (January 30, 2009) "Focus on Economic Data" Lesson), you will see that these figures have been adjusted by the BEA to reflect slower growth in 2007 than had been reported earlier. According to the BEA revised data, the real decline - negative growth - began in Q1 of 2008. The first estimate for Q4 of 2009 shows a dramatic reversal from negative growth that continued through Q3, to 2.2 percent growth in Q3, and the much greater growth of 5.7% in Q4 of 2009.
|Figure 1: U.S. Real GDP Growth Rate
|[NOTE: The 2007 and 2008 Real GDP estimates have been adjusted since their original publication to reflect analysis of more accurate and detailed lagging economic data.]|
Measuring the Economy - National Income and Product Accounts (NIPAs)
Figure 2 shows the quarterly changes in U.S. real GDP growth from 1990 through Q4 2009. Note the "business cycles" or periodic fluctuations in the growth rate. The times when growth has been negative for two or more quarters (1990-91, 2001, and 2008-09) have typically been declared recessions by the National bureau of Economic Research (NBER).
A recession is often the downward or declining segment of the business cycle. Cycles are measured from peak (top) to peak or trough (bottom) to trough. The upward segment of the cycle is a period of expansion. Figure 2 shows a typical business cycle: expansion (growth) - peak (top) - contraction (slowing or recession) - trough (bottom).
The NBER defines a recession as "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." A decline in growth of, say, 5 percent to 2 percent will not be identified as a recession. It is only the slowing growth period of a normal business cycle. Figure 3 is an illustration of the concept of the business cycle.
[The following definitions and examples are summarized or quoted from "Measuring the Economy: A Primer on GDP and the National Income and Product Accounts ," an online BEA publication.]
The Bureau of Economic Analysis produces the national income and product accounts (NIPAs), a set of economic measurements that provide information on the value and composition of output produced in the United States during a given period, and on the distribution and uses of the income generated by that production.
The primary measurement of the NIPAs is gross domestic product (GDP), which measures the value of the goods and services produced by the U.S. economy in a given time period. Thus, while GDP is the primary and most commonly used measurement of the economy’s output, it is only one of the BEA's measurements. Other NIPA's include personal income, corporate profits, and government spending.
The NIPAs help to answer questions such as: How fast is the economy growing or slowing? What industries are growing or slowing down? How does the trade deficit affect economic growth? How is the pattern of spending on goods and services in the economy changing?
Gross Domestic Product
GDP measures "the value of final goods and services produced in the United States in a given period of time. While GDP is used as an indicator of economic progress, it is not necessarily a measure of well-being or quality of life. It does not account for rates of poverty, crime, or literacy. The determination of GDP is not simply measuring production or sales." Measurement of GDP is base on these constraints:
GDP Can Be Measured in Three Ways.
GDP is the Sum of Four Basic Components
The January BEA announcement detailed the Q4 2009 GDP data by sectors and industry groups:
|Sector||Current Dollar*||Chained Dollar*||Change Q3 to Q4*|
|* Billions of U.S. dollars.|
"Real personal consumption expenditures increased 2.0 percent in the fourth quarter, compared with an increase of 2.8 percent in the third. Durable goods decreased 0.9 percent, in contrast to an increase of 20.4 percent. Nondurable goods increased 4.3 percent, compared with an increase of 1.5 percent. Services increased 1.7 percent, compared with an increase of 0.8 percent."
"Real nonresidential fixed investment increased 2.9 percent in the fourth quarter, in contrast to a decrease of 5.9 percent in the third. Nonresidential structures decreased 15.4 percent, compared with a decrease of 18.4 percent. Equipment and software increased 13.3 percent, compared with an increase of 1.5 percent. Real residential fixed investment increased 5.7 percent, compared with an increase of 18.9 percent."
"Real exports of goods and services increased 18.1 percent in the fourth quarter, compared with an increase of 17.8 percent in the third. Real imports of goods and services increased 10.5 percent, compared with an increase of 21.3 percent.
"Real federal government consumption expenditures and gross investment increased 0.1 percent in the fourth quarter, compared with an increase of 8.0 percent in the third. National defense decreased 3.5 percent, in contrast to an increase of 8.4 percent. Nondefense increased 8.1 percent, compared with an increase of 7.0 percent. Real state and local government consumption expenditures and gross investment decreased 0.3 percent, compared with a decrease of 0.6 percent."
"The change in real private inventories added 3.39 percentage points to the fourth-quarter change in real GDP after adding 0.69 percentage point to the third-quarter change. Private businesses decreased inventories $33.5 billion in the fourth quarter, following decreases of $139.2 billion in the third quarter and $160.2 billion in the second."
"Real final sales of domestic product -- GDP less change in private inventories -- increased 2.2 percent in the fourth quarter, compared with an increase of 1.5 percent in the third."
Gross domestic purchases
"Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- increased 5.1 percent in the fourth quarter, compared with an increase of 3.0 percent in the third."
Disposition of personal income
"Current-dollar personal income increased $119.2 billion (4.0 percent) in the fourth quarter, compared with an increase of $35.1 billion (1.2 percent) in the third."
"Personal current taxes decreased $11.7 billion in the fourth quarter, in contrast to an increase of $3.5 billion in the third."
"Disposable personal income increased $130.8 billion (4.8 percent) in the fourth quarter, compared with an increase of $31.6 billion (1.2 percent) in the third. Real disposable personal income increased 2.1 percent, in contrast to a decrease of 1.4 percent."
"Personal outlays increased $109.0 billion (4.2 percent) in the fourth quarter, compared with an increase of $132.3 billion (5.2 percent) in the third. Personal saving -- disposable personal income less personal outlays -- was $516.9 billion in the fourth quarter, compared with $495.0 billion in the third."
"The personal saving rate -- saving as a percentage of disposable personal income -- was 4.6 percent in the fourth quarter, compared with 4.5 percent in the third. 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 BEA GDP Release Fourth Quarter 2009 .
[NOTE: The table's are located at the bottom of the file]
"Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 6.4 percent, or $221.3 billion, in the fourth quarter to a level of $14,463.4 billion. In the third quarter, current-dollar GDP increased 2.6 percent, or $90.9 billion."
"Real GDP decreased 2.4 percent in 2009 (that is, from the 2008 annual level to the 2009 annual level), in contrast to an increase of 0.4 percent in 2008."
"The decrease in real GDP in 2009 primarily reflected negative contributions from nonresidential fixed investment, exports, private inventory investment, residential fixed investment, and personal consumption expenditures (PCE), that were partly offset by positive contributions from federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased."
"The downturn in real GDP primarily reflected downturns in nonresidential fixed investment and in exports and a larger decrease in private inventory investment that were partly offset by a larger decrease in imports and a smaller decrease in residential fixed investment."
"The price index for gross domestic purchases increased 0.1 percent in 2009, compared with an increase of 3.2 percent in 2008."
"Current-dollar GDP decreased 1.3 percent, or $182.7 billion, in 2009. Current-dollar GDP increased 2.6 percent, or $363.8 billion, in 2008."
"During 2009 (that is, measured from the fourth quarter of 2008 to the fourth quarter 2009), real GDP increased 0.1 percent. Real GDP decreased 1.9 percent during 2008. The price index for gross domestic purchases increased 0.6 percent during 2009, compared with an increase of 1.9 percent during 2008."
Per Capita GDP
Quite often, GDP is used to compare the sizes of national economies around the world - as a measure of standard of living. One caution about doing this - the real significance of a nation's total output is only meaningful when compared to the nation's population. By dividing the gross domestic product (current or real) by the population, you can determine the per capita real GDP.
U.S. GDP Q4 2009 (current dollar) $14,463.4 (billion)
U.S. Population (2009 est.) 308,000,000
U.S. Per capita GDP $46,959.09
When comparing the United States to other nations, this country may be larger (GDP) than most countries, but other countries may have a larger per capita GDP. In other cases, a country such as China may have a large GDP, but it's very large population means that China's per capita GDP is much smaller.
To look at the data about other nations, go to the CIA World Factbook "Guide to Country Comparisons. " Click on "Economy."
A nation’s potential GDP is the level of real GDP that the economy can produce with full employment. It is the nation’s capacity if it is using all of its productive resources.
Every quarter, the U.S. Department of Commerce releases an estimate of the nation’s potential GDP. The estimate is based on the capital stock, projected labor force growth, population trends, productivity, and other variables. The Commerce Department suggests that potential GDP isn't an absolute limit, but is measure of maximum sustainable output given the currently available resources.
The difference between the actual and potential GDP is often called the “output gap.” During periods of recession, there is a significant output gap, primarily a result of unused labor. Economist Arthur Okun proposed in 1962 that for every 1% increase in the unemployment rate, a country's GDP will be reduced by about 2 percent – or, 2 percent less than potential GDP. This is known as “Okun’s Law.” Using Okun’s “rule of thumb,” the current 10 percent U.S. unemployment rate may be resulting in a loss of 20 percent of potential output. Even adjusting the unemployment rate to include only cyclical unemployment, the current GDP gap may be at least be subtracting 10-12 percent of potential output. 10 percent of the U.S. output is somewhere around $1.4 trillion (with GDP at $14.5 trillion.)
To review: "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 5.7 percent in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.
Should be singing "Happy Days Are Here Again"?
Or, is it still "Brother Can You Spare a Dime?" (A song written in 1931 by E.Y. "Yip" Harburg and Jay Gorney)
News reaction to the 5.7 growth rate in Q4 was very positive, but most writers and analysts cautioned that growth will not continue at that rate. Most writers estimate a growth rate of 2-3 percent in 2010, assuming no critical events or unanticipated economic issues.
A January 30, 2010, New York Times article ("Economy Grew at Vigorous Pace in Last Quarter," by Catherine Rampell) warned about the accuracy of the first GDP estimate. "The latest measure of the nation’s output is a backward-looking figure, providing only clues of where the country may be headed. The number can be subject to major revisions, especially when the economy is at a turning point. The annual growth rate initially reported by the government for the third quarter of 2009 was 3.5 percent, but was later revised to 2.2 percent. The government’s final tally of last quarter’s output will be released in March."
Once I built a railroad, I made it run, made it race against time.
Once I built a railroad; now it's done. Buddy, can you spare a dime?
Once I built a tower, up to the sun, brick, and rivet, and lime;
Once I built a tower, now it's done. Buddy, can you spare a dime?
ASSESSMENT ACTIVITYNext, answer the essay questions below on the interactive notepad.
1. How is a nation's real per capita GDP determined?
2. What data from the BEA announcement supports the NBER decision that the U.S. is in a recession?
Recent GDP Data in Detail
Table 1 of the BEA GDP Release, Fourth Quarter 2009 estimates is a detailed breakdown of the data by sector and specific types of goods and services, investments, and trade, from 2006 through 2009.
Take a good look at the data. What are the areas of growth and decline? Was the data (growth rates) consistent throughout the period of time? Summarize your interpretation of the data in Table 1.
Go to the BEA web page, "National Income and Product Accounts Table, Table 7.1., Selected Per Capita Product and Income Series in Current and Chained Dollars ." You can use this page to look at changes in GDP over any selected period of time. Try looking at the changes over the years sine you were born.