This lesson focuses on the August 27, 2010, second estimate of U.S. real gross domestic product (real GDP) growth for the second quarter (Q2) of 2010, as 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, Economic Growth, Gross Domestic Product (GDP), Macroeconomic Indicators, Nominal Gross Domestic Product (GDP), Per Capita Gross Domestic Product (GDP), Potential Gross Domestic Product (GDP), Real Gross Domestic Product (GDP)

STUDENTS WILL

  • Determine the current, recent 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 on consumers and producers, 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.

This lesson focuses on the BEA's "second estimate" of real GDP released on August 27, 2010, for the second quarter (April, May and June) of 2010. 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 first half of the 2010-2011 school year (August-December), EconEdLink will publish five Focus on Economic Data lessons on U.S. Real GDP Growth.

GDP data is announced three times for each fiscal quarter. For Q2 2010, the first estimate is made in July, the second estimate is made in August, and the third (final) estimate for Q2 is made in September.

GDP data reports lag the reporting period - fiscal quarter. The current estimate is for Q2 (April-June, 2010). Each of the three estimates for a quarter will be based on more complete and comprehensive data, and may modify the growth rate reported previously.

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.]


Fall Semester 2010-2011 Real GDP "Focus on Economic Data" Lessons:

Each Real GDP lesson will provide the most up-to-date data and focus on some specific topics or issues related to GDP:

  • August 27 (second estimate for Q2, 2010): What are GDP, real GDP, per capital GDP, potential GDP. Recent history of real GDP.
  • September 30 (third estimate for Q2 2010): GDP and business cycles, indicators of future growth (decline).
  • October 29 (first estimate for Q3 2010): Factors influencing the change in GDP, revisions, and seasonal adjustments. How the data is collected.
  • November 23 (second estimate for Q3 2010): U.S. regional economic growth comparisons and international comparisons.
  • December 22 (third estimate for Q3 2010): Year-end summary and GDP-related current issues

MATERIALS


Key Economic Indicators

as of August 27, 2010

Inflation

On a seasonally adjusted basis, the CPI-U increased 0.3 percent in July after falling 0.1 percent in June. The index for all items less food and energy increased 0.1 percent in July after increasing 0.2 percent in June.

Employment and Unemployment

Total non-farm payroll employment declined by 131,000 in July, and the unemployment rate was unchanged at 9.5 percent. Federal government employment fell, as 143,000 temporary workers hired for the decennial census completed their work. Private-sector payroll employment edged up by 71,000.

Real GDP

U.S. real gross domestic product increased at an annual rate of 1.6 percent in the second quarter of 2010, that is, from the first quarter to the second quarter, according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent.

Federal Reserve

The Committee (FOMC) will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

PROCESS

First, What are GDP and Real GDP?

Simply put, gross domestic product (GDP) measures "the value of final goods and services produced in the United States in a given period of time."

Real GDP, also in simple terms, is GDP adjusted for the effect of a change in the price level - thus, a measure of "real" growth without inflation.

While GDP is considered an indicator of economic progress, it is not necessarily a measure of well-being or quality of life, because it does not account such factors as income distribution, rates of poverty, crime, or literacy. GDP measures the nation's output of goods and services - and is generally related to levels of employment, and income.

[NOTE: A more detailed definition of GDP and its components can be found later in this lesson.]

Bureau of Economics Analysis: Gross Domestic Product: Second Quarter 2010 (Second Estimate)

Announcement date: August 27, 2010

"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 1.6 percent in the second quarter of 2010, that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent."

The August 27 real GDP announcement was the second of three BEA estimates of GDP for the second quarter (Q2) of 2010. Each announcement is based on additional or more complete data than the prior estimate. The BEA reported, "The GDP estimates released today are based on more complete source data than were available for the "advance" estimate issued last month (July). In the advance estimate, the increase in real GDP was 2.4 percent." The US growth rate was, according to the August 27 estimate, less than the previous estimate. The U.S. economy grew more slowly than previously thought. 

Discussion Question: Is it helpful for the BEA to make three announcements of the GDP growth of a quarter?

[Note to teachers: The second and third announcements for a quarter are based on more complete or new data. This is a good time to introduce leading, concurrent and lagging indicators. Link to Conference Board indexes of indicators: www.conference-board.org/data/bcicountry.cfm?cid=1 ]

Where Did Q2 Growth Come From?

The BEA announcement identified the sectors of the economy that improved and those that slowed. "The increase in real GDP in the second quarter primarily reflected positive contributions from nonresidential fixed investment, personal consumption expenditures, exports, federal government spending, private inventory investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased."

"The deceleration (change in the rate of growth) in real GDP in the second quarter primarily reflected a sharp acceleration in imports and a sharp deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending."

Comments on two major spending categories: "Final sales of computers added 0.03 percentage point to the second-quarter change in real GDP after adding 0.10 percentage point to the first-quarter change. Motor vehicle output subtracted 0.08 percentage point from the second-quarter change in real GDP after adding 0.74 percentage point to the first-quarter change."

[Note to teachers: Motor vehicle sales, as a part of GDP, fell in the quarter. One good question is: Did cash-for-clunkers and other incentives artificially increase car sales in the previous quarters?]

The Impact of Inflation and Measuring Real GDP

To adjust for inflation, the BEA uses the percent change in the price index for gross domestic purchases. The BEA defines this as the change in the "prices of goods and services purchased by U.S. residents, regardless of where the goods and services are produced. The gross domestic purchases price index is derived from the prices of personal consumption expenditures, gross private domestic investment, and government consumption expenditures and gross investment. Thus, for example, an increase in the price of imported cars would raise the prices paid by U.S. residents and thereby directly raise the price index for gross domestic purchases."

The BEA announcement added, "The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.1 percent in the second quarter, the same increase as in the advance estimate; this index increased 2.1 percent in the first quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 0.8 percent in the second quarter, compared with an increase of 1.6 percent in the first."

The bottom line: Inflation remained low in Q2 2010. Energy - usually the price level wild card - can significantly affect the overall rate of price level ups and downs. This month, energy was not a significant factor and lower energy prices somewhat kept overall inflation low.

Discussion Question: How did inflation affect you in the past few months? Did you notice any price changes? For recent inflation data, go to the U.S. Bureau of Labors Statistics website - www.bls.gov .

The Components of GDP in Q2 2010

GDP is generally reported as the sum of four components. The August 27 BEA announcement reported:

  • Consumption: "Real personal consumption expenditures increased 2.0 percent in the second quarter, compared with an increase of 1.9 percent in the first."
  • Investment: "Real nonresidential fixed investment increased 17.6 percent, compared with an increase of 7.8 percent. Nonresidential structures increased 0.4 percent, in contrast to a decrease of 17.8 percent. Equipment and software increased 24.9 percent, compared with an increase of 20.4 percent. Real residential fixed investment increased 27.2 percent, in contrast to a decrease of 12.3 percent."
  • Net Exports: "Real exports of goods and services increased 9.1 percent in the second quarter, compared with an increase of 11.4 percent in the first. Real imports of goods and services increased 32.4 percent, compared with an increase of 11.2 percent."
  • Government Spending: "Real federal government consumption expenditures and gross investment increased 9.1 percent in the second quarter, compared with an increase of 1.8 percent in the first. National defense increased 7.3percent, compared with an increase of 0.4 percent. Nondefense increased 12.9 percent, compared withan increase of 5.0 percent. Real state and local government consumption expenditures and gross investment increased 1.2 percent, in contrast to a decrease of 3.8 percent."

[NOTE: More detailed definitions of the four categories can be found later in this lesson.]

The Impact of Inventories

Inventory consists of the raw materials, intermediate goods, and finished goods that are ready for sale. Inventories represent one of the most important assets of a business. The turnover of inventory represents a sources of revenue generation and subsequent earnings for a company.

Holding a large amount of inventory over time is not usually good for a business. Holding inventory means that the business has paid the costs to produce good that have not been sold. Holding too little inventory may be bad because the business risks of losing potential sales and potential market share.

The BEA identifies the impact of changes in inventories - "Changes in inventories are the smallest component of the GDP, usually less than 1% of GDP but they are much more important than their absolute size. In fact, large changes in inventories signal changes in aggregate demand and, thus, are indicators of future economic activity. As the change in inventories is a flow equal to the change in the stock of unsold goods, they are a form of investment, often referred to as involuntary investment."

"The change in real private inventories added 0.63 percentage point to the second-quarter change in real GDP, after adding 2.64 percentage points to the first-quarter change. Private businesses increased inventories $63.2 billion in the second quarter, following an increase of $44.1 billion in the first quarter and a decrease of $36.7 billion in the fourth."

"Real final sales of domestic product -- GDP less change in private inventories -- increased 1.0percent in the second quarter, compared with an increase of 1.1 percent in the first."

Gross Domestic Purchases

BEA data: "Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- increased 4.9 percent in the second quarter, compared with an increase of 3.9 percent in the first." This data differs from GDP in that some goods and services may have been produced in other countries. Were we purchasing more imports in Q2?

Gross National Product

In 1991, the United States switched from using gross national product (GNP to gross domestic product GDP) as the primary measurement of production or output GDP is product produced within a country's borders. GNP is product produced by enterprises owned by a country's citizens. Using GDP essentially factors out the production from firms outside the US and the impact of trade.

"Real gross national product -- the goods and services produced by the labor and property supplied by U.S. residents -- increased 1.7 percent in the second quarter, compared with an increase of 4.4percent in the first. GNP includes, and GDP excludes, net receipts of income from the rest of the world,which increased $2.1 billion in the second quarter after increasing $22.9 billion in the first; in the second quarter, receipts increased $13.7 billion, and payments increased $11.6 billion." 

Current-Dollar GDP

"Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 3.6 percent, or $128.6 billion, in the second quarter to a level of $14,575.0 billion. In the first quarter, current-dollar GDP increased 4.8 percent, or $169.1 billion."

Current dollar GDP (also called nominal GDP) reflects the prices currently paid by consumers, businesses and governments. For a true measurement of the value of output in "today's" dollars, use the current-dollar GDP.

Revisions from the Advance Estimate for Q2 2010

"The “second” estimate of the second-quarter increase in real GDP is 0.8 percentage point, or $25.0billion, lower than the advance estimate issued last month, primarily reflecting an upward revision to imports and downward revisions to private inventory investment and to exports that were partly offset by an upward revision to personal consumption expenditures.

  Advance (July) Second (August)*
  Estimate Estimate
Real GDP 2.4 1.6
Current Dollar GDP 4.3 3.6
Gross Domestic Purchases Price Index 0.1 0.1
*Percent change from preceding quarter

Overview of the 2008-2010 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. Though the real GDP growth rate has been positive since third quarter of 2009, the NBER has yet to identify the trough (bottom and end) of the recession, since unemployment has remained very high and other indicators of future growth are not clear.

Table 1, below, shows the rates of change of real GDP from 2007 to the present. Note the erratic pattern of declines and growth. 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.

ASSESSMENT ACTIVITY

Short Answer Questions:


1. How is a nation's real per capita GDP determined?

[Real per capita GDP is the nation's real GDP divided by the nation's population.]

2. What data from the BEA announcement supports the NBER decision that the U.S. is in a recession?

[The NBER decided that a recession began because GDP growth slowed dramatically and that unemployment had increased significantly throughout 2008 and mid-2009. The BEA reports on real GDP since January 2008 have shown a pattern of decreases. In addition, the unemployment rate has doubled since that time.]

CONCLUSION

In Q2 of 2010, the U.S economy continued to grow, but at a much slower pace than previously estimated, and at an even slower rate than the previous year. Economists and financial analysts' opinions are mixed as to the meaning of this growth pattern. Some predict a slow, but steady, growth rate after the short period of growth resulting from various stimulus programs. A more negative view is that of a "double dip" recession - decline - some growth - and further decline.

The U.S. annualized growth rate was 1.6 percent in Q2. Unemployment has remained historically high during this period, still at 9.5 percent in June and July.

The Federal Reserve has kept the federal funds rate target at almost zero to keep other interest rates low and encourage borrowing and lending.

Are we still in the recession, even though GDP has increased in recent months? Check the NBER web page for an explanation of the signs of recession. http://www.nber.org/cycles/recessions_faq.html

EXTENSION ACTIVITY

The BEA announcement provides a breakdown of U.S. gross domestic product growth by quarter from Q3 2006 to the present. Take a good look at the data over the time period. What are the areas of growth and decline? Was the data (growth rates) consistent throughout the period of time?

Real Gross Domestic Product and Related Measures: Percent Change From Preceding Period, http://www.bea.gov/newsreleases/national/gdp/2010/pdf/gdp2q10_2nd.pdf

Summarize your interpretation of the data in Table 1.

Take a look at the other tables. What information do they give you about the health of the economy?

[Note to teachers: Assign pairs or small groups to look at different data tables. They can summarize the data and suggest their meanings to the other groups.]