Return

This lesson focuses on the October 27, 2011, first (advance) estimate of U.S. real gross domestic product (real GDP) growth for the third quarter (Q3) of 2011, 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, Coincident Indicators, Gross Domestic Product (GDP), Lagging Indicators, Leading Economic Indicators, Macroeconomic Indicators, Nominal Gross Domestic Product (GDP), Per Capita 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.

This lesson focuses on the BEA's first (advance) estimate of real GDP released on October 27, 2011, for the third quarter of 2011 (July-September.) 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 semester of the 2011-2012 school year (August-December), EconEdLink will publish five Focus on Economic Data lessons on "U.S. Real GDP Growth."  Real GDP data is announced three times for each fiscal quarter. For Q3 2011, the first estimate is made in October, the second estimate is made in November, and the third (final) estimate for Q3 is made in December.]

[NOTE: GDP data reports lag the reporting period - the fiscal quarter. The current estimate is for Q3 of 2011 (July-August).  Each of the three estimates 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:

  • August (second estimate for Q2 2011): How to read the data, real vs. nominal, and how the data is collected
  • September (third estimate for Q3 2011): Factors influencing the change in GDP, revisions, and seasonal adjustment
  • October (first estimate for Q3 2011): Business cycles and indicators of future growth (decline) THIS LESSON
  • November (second estimate for Q3 2011): Regional GDP growth data and international comparisons.
  • December (third estimate for Q3 2011): Year-end summary and future growth factors.

RESOURCES

  • Measuring the Economy: A Primer on GDP and the National Income and Product Accounts: This BEA article introduces new users to the basics of U.S. national income and product accounts.
    www.bea.gov/national/pdf/nipa_primer.pdf
  • Global Business Cycle Indicators: This site produced by The Conference Board, provides business cycle indicators for 11 countries around the world.
    www.conference-board.org/data/bci.cfm
  • NBER determination of the December 2008 Peak in Economic Activity: This is the NBER recession announcement made on December 1, 2008. 
    www.nber.org/cycles/dec2008.html

Key Economic Indicators

as of October 27, 2011

Inflation

On a seasonally adjusted basis, the CPI-U increased 0.3 percent in September after increasing 0.4 percent in August. The index for all items less food and energy rose 0.1 percent in September after increasing 0.2 percent in August.

Employment and Unemployment

Nonfarm payroll employment edged up by 103,000 in September, and the unemployment rate held at 9.1 percent. The increase in employment partially reflected the return to payrolls of about 45,000 telecommunications workers who had been on strike in August.

Real GDP

Real gross domestic product increased at an annual rate of 2.5 percent in the third quarter of 2011 according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.

Federal Reserve

The FOMC decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The FOMC also decided to purchase up to $400 billion of long-term securities and sell short-term securities in order to "put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative."

PROCESS

The U.S. economy is growing.  More goods and services are being produced and purchased in the U.S.  Unfortunately, the national unemployment rate remains very high.  The increase in output is not creating enough new jobs.  Or, employers are not hiring enough new workers to create enough growth.  Take a look at the most recent BEA estimate of real GDP growth to learn more.

News Release: National Income and Product Accounts, Gross Domestic Product, 3rd quarter 2011 (advance estimate)

U.S. Bureau of Economic Analysis
Released: October 27, 2011

"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 2.5 percent in the third quarter of 2011 (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 increased 1.3 percent."

Remember, real GDP estimates for a quarter are released three times over three months. For the third quarter (Q3) of 2011, this is the first estimate.  More precise estimates will be made in November and December, 2011.  The BEA press release 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 22, 2011.”

The news release comments on the sectors that contributed significantly to the change in output - the increase or decrease in real GDP growth - from the previous quarter. "The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, exports, and federal government spending that were partly offset by negative contributions from private inventory investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased."

"The acceleration in real GDP in the third quarter primarily reflected accelerations in PCE and in nonresidential fixed investment and a smaller decrease in state and local government spending that were partly offset by a larger decrease in private inventory investment." Acceleration refers to the rate at which the sector increased. 

[Teacher Note: Ask your students: Is 2.5 percent real GDP growth enough?]

Each month recently, the BEA has commented specifically on two important product groups – motor vehicles and computers. “Final sales of computers added 0.21 percentage point to the third-quarter change in real GDP after adding 0.07 percentage point to the second-quarter change. Motor vehicle output added 0.07 percentage point to the third-quarter change in real GDP after subtracting 0.10 percentage point from the second-quarter change."

[Teacher Note: These two product groups are seen as significant indicators of growth or decline. Ask your students why there is so much interest in the health and growth of these two product groups.  Answer: The BEA responds to the interests of the data users.  In this case, the specific references to autos and computers is driven by these interests, who see to see these product groups as representative of the growth trend and the future.]

Figure 1, below, graphically shows the growth rates of U.S. real GDP from 2000 through Q3 2011. Note the business cycles – periods of growth and decline. Business cycles are defined later in this lesson.

figure1


[Note to Teachers;  Students should be able to identify the recent periods of recession.  To confirm the "official" recessions identified by the National Bureau of Economic Research (NBER), go to: www.nber.org/cycles/cyclesmain.html ]

A Note About “Real” GDP Growth

To adjust for the effect of inflation and to determine “real” GDP, the BEA uses a price index. The price index for gross domestic purchases is the “percent change in the price index for gross domestic purchases. This index measures 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.”

For Q3 2011, the BEA stated in the news release, “The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 2.0 percent in the third quarter, compared with an increase of 3.3 percent in the second. Excluding food and energy prices, the price index for gross domestic purchases increased 1.8 percent in the third quarter, compared with an increase of 2.7 percent in the second. "

[Note to teachers:  To link the real GDP growth rate to a lesson on "inflation," see the most recent EconEdLink lesson on "Consumer Price Index and Inflation."  Link: http://www.econedlink.org/lessons/economic-lesson-search.php?type=educator&gid=4

All of the sectors grew in Q3 2011?

Remember, GDP is determined by the addition of personal consumption expenditures (c), Net private investment (I), government expenditures and investment (G) and net exports (X). 

C + I + G + X = Y (GDP)

C - "Real personal consumption expenditures increased 2.4 percent in the third quarter, compared with an increase of 0.7 percent in the second. Durable goods increased 4.1 percent, in contrast to a decrease of 5.3 percent. Nondurable goods increased 0.2 percent, the same increase as in the second. Services increased 3.0 percent, compared with an increase of 1.9 percent."

I - "Real nonresidential fixed investment increased 16.3 percent in the third quarter, compared with an increase of 10.3 percent in the second. Nonresidential structures increased 13.3 percent, compared with an increase of 22.6 percent. Equipment and software increased 17.4 percent, compared with an increase of 6.2 percent. Real residential fixed investment increased 2.4 percent, compared with an increase of 4.2 percent."

X - "Real exports of goods and services increased 4.0 percent in the third quarter, compared with an increase of 3.6 percent in the second. Real imports of goods and services increased 1.9 percent, compared with an increase of 1.4 percent."

G - "Real federal government consumption expenditures and gross investment increased 2.0 percent in the third quarter, compared with an increase of 1.9 percent in the second. National defense increased 4.8 percent, compared with an increase of 7.0 percent. Nondefense decreased 3.7 percent, compared with a decrease of 7.6 percent. Real state and local government consumption expenditures and gross investment decreased 1.3 percent, compared with a decrease of 2.8 percent."

Another key factor impacting the determination of GDP is the change in inventories.  The BEA commented: "The change in real private inventories subtracted 1.08 percentage points from the third-quarter change in real GDP after subtracting 0.28 percentage point from the second-quarter change. Private businesses increased inventories $5.4 billion in the third quarter, following increases of $39.1 billion in the second quarter and $49.1 billion in the first."

[Note to teachers: Inventories subtracted significantly from GDP in Q3 2011 (minus 1.08 percent.)    Ask the students what this might mean, as they think about this BEA real GDP growth announcement. If consumer demand does not increase and inventories build, how might producers respond? (high inventory levels may cause businesses reduce output, to lay-off workers or not hire).]

What is the U.S. current-dollar GDP"

"Current-dollar GDP Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 5.0 percent, or $185.8 billion, in the third quarter to a level of $15,198.6 billion. In the second quarter, current-dollar GDP increased 4.0 percent, or $145.0 billion."

U.S. current-dollar GDP increased at a slightly faster rate in Q3 than in Q2. Real GDP also increased at a slightly faster rate - 2.5 percent in Q3 after a 1.3 percent increase in Q2.

Figure 2, below, shows the current dollar and constant dollar (real) GDP data from 2000 through Q3 2011. The difference between the current dollar figure and the constant dollar figure is the rate of inflation. These figures are in billions of U.S. dollars.  The current dollar GDP in Q3 2011 was about $15.2 trillion and real GDP was almost $13.4 trillion.  Almost $2 trillion of the increase in U.S. GDP since 2005, the base year in the price index for gross domestic purchases) has resulted from a change in the price level.

U.S. Current-Dollar and Constant-Dollar

Gross Domestic Product
Years 2000 – Q3 2011

Year Current-Dollar GDP Constant-Dollar "Real" GDP
2000 $9,951.5 $11,226.0
2001 10,286.2 11,347.2
2002 10,642.3 11,553.0
2003 11,142.1 11,840.7
2004 11,867.8 12,263.8
2005 12,638.4 12,638.4
2006 13,398.9 12,976.2
2007 14,061.8 13,228.9
2008 14,369.1 13,228.8
2009 14,119.0 12,880.6
2010 14,660.4 13,248.2
2011 (Q3) 15,198.4 13,352.8


[Note to Teachers: Use the above data to reinforce the meaning of the “current dollar” and “constant dollar” measurements of GDP. You can relate this to the real purchasing power of income over time. It takes more dollars today to purchase a like amount of goods and services than in earlier years.]

Per Capita GDP

U.S. GDP in Q3 2011 was $15.199 trillion - that's about $48,652 per capita.*

*The U.S. population was approximately 312.4 million at the end of Q3 2011.

Although per capita GDP has increased, other BEA data shows that real disposable personal incomes decreased by 1.7 percent in September, 2011.  Source: http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm.

Disposition of personal income

"Current-dollar personal income increased $29.5 billion (0.9 percent) in the third quarter, compared with an increase of $145.7 billion (4.6 percent) in the second."  

"Personal current taxes increased $12.5 billion in the third quarter, compared with an increase of $35.2 billion in the second."  

"Disposable personal income increased $17.0 billion (0.6 percent) in the third quarter, compared with an increase of $110.5 billion (3.9 percent) in the second. Real disposable personal income decreased 1.7 percent, in contrast to an increase of 0.6 percent."   While current dollar disposable personal incomes increased in September, real disposable incomes did not keep pace with inflation.

Spending and Saving

"Personal outlays increased $133.1 billion (4.9 percent) in the third quarter, compared with an increase of $100.5 billion (3.7 percent) in the second. Personal saving -- disposable personal income less personal outlays -- was $472.7 billion in the third quarter, compared with $588.9 billion in the second. The personal saving rate -- saving as a percentage of disposable personal income -- was 4.1 percent in the third quarter, compared with 5.1 percent in the second."    

[Teacher Note: 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 www.bea.gov/national/nipaweb/Nipa-Frb.asp .]

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. A recession, a "significant decline in economic activity spread across the economy, lasting more than a few months," is identified by the National Bureau of Economic Research (NBER) "Business Cycle Dating Committee." In addition to real GDP, the key measurements in the determination of a recession are real income, payroll employment, industrial production, and wholesale-retail sales. Recently, the NBER has identified payroll employment as the key criteria used to identify business cycles.

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 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.”

In September, 2009, the NBER identified the end of the recession.  "The committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months."

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

figure 3


Measuring Economic Activities – 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 released on October 20, 2011.

"The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.2 percent in September to 116.4 (2004 = 100), following a 0.3 percent increase in August, and a 0.6 percent increase in July."

"Says Ataman Ozyildirim, economist at The Conference Board: “September data shows moderating growth in both the LEI and the CEI. The weaknesses among the leading indicator components have become slightly more widespread in September. Moreover, the CEI suggests current economic conditions have been slow, with weak gains in all four components over the past six months. The slow pace in the LEI suggests a growing chance that this sluggish economy is going to be here for a while.”

"Says Ken Goldstein, economist at The Conference Board: “The LEI is pointing to soft economic conditions through the end of 2011. There is a risk that already low confidence – consumer, business and investor – could weaken further, putting downward pressure on demand and tipping the economy into recession. The probability of a downturn starting over the next few months remains at about 50 percent.”

"The Conference Board Coincident Economic Index® (CEI) for the U.S. increased 0.1 percent in September to 103.3 (2004 = 100), following a 0.1 percent decline in August, and a 0.2 percent increase in July."  

"The Conference Board Lagging Economic Index® (LAG) increased 0.2 percent in September to 110.4 (2004 = 100), following a 0.2 percent increase in August, and a 0.3 percent increase in July."

Coincident indicators, such as employment, production, personal income, and manufacturing and trade sales, measure current aggregate economic activity.

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

 

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

  • 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

 

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.

  • 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 (%)

[Note to teachers: Students may be interested in the meanings of the leading, concurrent and lagging economic indicators.   Go to the Conference Board web page: Economic Indicators for more information.]

CONCLUSION

"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 2.5 percent in the third quarter of 2011 (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 increased 1.3 percent."

One common "benchmark" for real GDP growth is an annual rate of 3 percent - just below the trend line over the past several decades.  How can the economy grow at a faster rate?

  • Consumer can buy more.
  • Businesses can invest more.
  • Governments can spend more.
  • Exports can increase more than imports.
     

Which do you think will happen as the United States really grows out of the recession?

ASSESSMENT ACTIVITY


Short Answer Question:

1. If gross domestic product increases by 10 percent over a year, are we better off? Why or why not?

[Possible Answer: Perhaps we are better off. Maybe not. The answer depends upon what is happening to prices and what is happening to population. If prices and population together are rising by more than 10 percent per year, than we, on average, are worse off. We have fewer goods and services per person. If the nation's real per capita GDP increases, we may be "better off."]

EXTENSION ACTIVITY

Take another look at The Conference Board's  "Leading Economic Index" for the United States.

Which of these data points do you think are good indicators of the future health of the U.S. 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. For descriptions of the components of the Leading Economic Index, go to "www.conference-board.org/data/bci/index.cfm?id=2160 .

U.S. Indicators

Link to The Conference Board's most recent press release " The Conference Board Leading Economic Index® (LEI) for the U.S. Increases Again," released March 17, 2011.  LINK:  www.conference-board.org/pdf_free/economics/bci/MschoolT.pdf

Global Indicators

For more information about The Conference Board's "global business cycle indicators," go to: www.conference-board.org/data/bci.cfm