This lesson focuses on the third and final estimate of U.S. real gross domestic product for the second quarter (Q2) of 2012, as reported by the U.S. Bureau of Economic Analysis (BEA) on September 27, 2012. The current data and historical GDP 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.
- Determine the current and historical level and growth of U.S. real gross domestic product.
- Idenitify the sectors that increased and decreased in size during the reported quarter.
- 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 Indicatorsas of December 9, 2014
The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in October on a seasonally adjusted basis. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment. Gasoline and other energy indexes declined, offsetting increases in shelter and other indexes to leave the seasonally adjusted all items index unchanged. The core inflation index rose 0.2 percent in October.
According to the November report of the Bureau of Labor Statistics, the unemployment rate stayed constant at 5.8%, while total nonfarm employment rose by 321,000. Employment gains continued in retail trade, food services and health care, but also extended to a number of white collar job sectors as well, including financial, insurance, and real estate. In addition, the number of long-term unemployed (those unemployed at least six months) fell by over 100,000.
The revised estimate for real GDP growth in the third quarter of 2014 was 3.9%, an increase from the initial estimated third quarter growth of 3.5%, but down slightly from the second quarter growth of 4.6%. All components of GDP experienced increases in the third quarter, with the exception of private inventories, which decreased slightly.
The FOMC believes that the labor market has shown considerable improvement and the risks of inflation rising above its 2% target are low. Therefore, the Federal Reserve announced plans to end its purchase of financial assets. In addition, the federal funds rate will remain at its current low level. However, the FOMC has signaled its willingness to increase the federal funds rate if inflation shows signs of rising above the 2% target.
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. GDP is measured quarterly and each quarter's data is reported over the following three months.
This lesson focuses on the BEA's third and final estimate of real GDP growth for the second quarter (Q2) of 2012 (April-June.) 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 2012-2013 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 Q2 2012, the first estimate was made in late July. The second estimate was made in late August. The third estimate for Q2 was made September 27 (THIS LESSON.)
[NOTE: GDP data reports lag the reporting period - the fiscal quarter. The current estimate is the third estimate for Q2 2012. 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.]
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 2012): How to read the data, real vs. nominal, and how the data is collected
- September (third estimate for Q2 2012): Factors influencing the change in GDP, revisions, and seasonal adjustment
- October (first estimate for Q3 2012): Business cycles and indicators of future growth or decline.
- November (second estimate for Q3 2012): More details of GDP U.S. regional growth and international comparison.
- December (third estimate for Q3 2012): Year-end summary.
- Real GDP Growth BEA third estimate of real GDP growth for Q2 2012.www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_3rd.pdf
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.
Taking the Pulse of the Economy: Measuring GDP: This article discusses the importance of measuring GDP.
Overview of the U.S. Economy: Perspective from the BEA Accounts: This page provides an overview of current economic data.
Global Business Cycle Indicators: This site produced by The Conference Board, provides business cycle indicators for 11 countries around the world.
NBER determination of the December 2008 Peak in Economic Activity: This is the NBER recession announcement made on December 1, 2008.
NBER determination of the trough and the end of the most recent recession in June, 2009.
Key Economic Indicatorsas of September 27, 2012
On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers increased 0.6 percent in August after being unchanged in July. The index for all items less food and energy rose 0.1 percent in August, the same increase as in July.
Total nonfarm payroll employment rose by 96,000 in August, and the unemployment rate edged down to 8.1 percent. Employment increased in food services and drinking places, professional and technical services, and health care.
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 1.3 percent in the second quarter of 2012 (that is, from the first quarter to the second quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent.
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 economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
On September 27, 2012, the U.S. Bureau of Economic Analysis announced the third (final) estimate of U.S. real gross domestic product growth for the second quarter (April-June) of 2012. In Q2 2012. Real GDP grew at an annualized rate of just 1.3 percent.
What is the U.S. Gross Domestic Product?
Current-dollar U.S. GDP, as defined by the BEA was $15.586 trillion. That was an increase of $107.3 billion (2.8 percent annualized rate) over Q1. In the first quarter of 2012, U.S. GDP grew $157 billion or at a 4.2 percent annualized rate. The pace of growth of the economy slowed in the second quarter.
[Teacher Note: Ask your students if they have seen any evidence of economic growth over the past several months? New construction? New businesses?]
Real GDP is the current dollar GDP adjusted for inflation. It reflects the current value of all of the goods and services produced in a year, expressed the prices of the base-year. It might also be called "inflation-corrected" GDP or "constant dollar GDP."
U.S. real GDP in Q2 2012 was $13,548.5 (base year 2005) . The total current dollar increase in U.S. GDP from year 2005 to Q2 2012 was $2.963 billion, but only $925.5 billion of that growth was "real."
Note to Teachers and Students: Unless otherwise cited, the quoted sections of this lesson are from the BEA's September 27, 2012, "Gross Domestic Product: Second Quarter 2012," news release. www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_3rd.pdf Real GDP Growth Real GDP Growth
[Teacher Note: If you are introducing GDP for the first time, you may want to use these CEE Virtual Economics video clips:
- Aggregate Demand: www.econedlink.org/interactives/index.php?iid=197
- Aggregate Supply: www.econedlink.org/interactives/index.php?iid=198
- Economic Growth: www.econedlink.org/interactives/index.php?iid=201
- Gross Domestic Product: www.econedlink.org/interactives/index.php?iid=204
- Real vs. Nominal: www.econedlink.org/interactives/index.php?iid=207]
U.S. Bureau of Economic Analysis News Release
National Income and Product Accounts
Gross Domestic Product: Second Quarter 2012 (Third Estimate)
Released: September 27, 2012
"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 1.3 percent in the second quarter of 2012 (that is, from the first quarter to the second quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent."
The second estimate of real GP growth in Q2 2012 (made in August) was 1.7 percent. The third estimate was significantly lower than the earlier estimates. The first (advance) estimate for Q2 made in July was 1.5 percent growth. The BEA news release commented on the difference, "The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month."
Read the entire text of the September 27, 2012, BEA news release to learn more details about recent U.S. real GDP growth. Remember, the BEA releases the estimate for each quarter three times. This was the third estimate for Q2 2012. The first estimate for Q2 2012 was a growth rate of 1.5 percent. The first estimate was revised upward to 1.7 percent in August. This estimate revised the growth rate estimate downward to 1.3 percent. URL: www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_3rd.pdf
[Teacher Note: Ask your students if a real GDP growth rate of 1.3 percent sounds like enough to be called a "recovery" from the recession? Is it enough to create enough new jobs to lower the persistently high unemployment rate? Economist Arthur M. Okun suggested generally that one point change in the unemployment rate correlates to a two percentage point change in real GDP an vice-versa. This is called "Okun's Law." Okun's Law is introduced in this lesson's conclusion. EconEdLink lesson on "Okun's Law," www.econedlink.org/lessons/index.php?lid=848&type=educator]
Quarterly estimates often vary over the three reporting months. Example: For Q3 2011, the first estimate was 2.5 percent GDP growth. The second estimate was 2.0 percent . The final estimate (still subject to revision) was just 1.8 percent - a total drop of 0.7 percentage points. You can access past GDP announcements at www.bea.gov/histdata/NIyear.asp
[Note to Teachers: One benchmark used to assess the "health" of the economy is the annual rate of GDP growth. The CEE lesson "Economic Misery and Presidential Elections" uses a 3.0 percent growth rate as a determinant of an adequate growth rate that influences voters to feel good or bad about the economy and the current administration. In the lesson, this benchmark is used along with the "misery Index," consisting of the unemployment and inflation rates. See the lesson in Focus: Understanding Economics in Civics and Government , Council for Economic Education, 2009 (Order # 0662, ISBN: 978-1-56183-662-8) Lesson 8, page 99. or online at: www.econedlink.org/election-lessons/?topic=1]
Where was the GDP growth in Q2 2012?
The BEA identifies the primary areas of growth or decline in each news release. "The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, and residential fixed investment 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."
In addition, the BEA identifies the areas of "acceleration" and "deceleration," significant changes in the rates of growth or decline of sectors. "The deceleration in real GDP in the second quarter primarily reflected decelerations in PCE, in nonresidential fixed investment, and in residential fixed investment that were partly offset by smaller decreases in federal government spending and in state and local government spending and an acceleration in exports."
[Teacher Note: Reinforce student understanding that "acceleration" means a speeding up of the rate of growth and "deceleration means slowing down - just as if driving an automobile. The car is still moving forward, but at a faster or slower rate of speed.]
Figure 1, below, shows graphically the U.S. quarterly real GDP growth rates from the year 2000 through Q2 2012. Note the real GDP negative growth in late 2008 and early 2009. This is the period that looks like the traditional definition of a recession. According to the National Bureau of Economic Research (NBER), the recession began in December, 2007, and ended in June, 2009 (www.nber.org/cycles.html
Remember, the formula to determine GDP (Y) is to add personal consumption expenditures (C), net private investment (I), government spending (G) and Net exports (X).
C + I + G + X = Y
The BEA breaks down the quarterly growth or decline by spending category - personal consumption expenditures (PCE), private investment, government spending, and net exports. See Figure 2, below.
For a more detailed list of real GDP changes in Q2 by major category, see the press release. Scroll down to Table 2: www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_3rd.pdf
The BEA also breaks down the GDP data by key industry groups.www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_3rd.pdf Scroll down to Table 3.
[Note to teachers: Make sure your students are clear about the difference between the nominal (current dollar) GDP and the real (chained dollar) GDP measurements.]
[Note to Teachers: To compare the U.S. per capita GDP with the per capita GDPs of other nations, see the CIA World Factbook, www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html . Remember, a high per capita GDP doesn't necessarily mean that all people in a country have high incomes or a high standard of living. In many instances, GDP figures for a nation do not accurately reflect the well-being of all individuals in that nation. If purchasing power varies among nations, the term “purchasing power parity” (PPP) is used to reflect economic data that has been adjusted by varying national price levels.]
Annual GDP Estimate Revisions
According to the BEA annual revisions to GDP estimates are made each year in order to:
- Incorporate most complete and reliable source data.
- Provide a more detailed picture of the economy.
- Make improvements to methods used for preparing the estimates.
Quarterly GDP data is seasonally adjusted to remove variations that normally occur at about the same time and in about the same magnitude each year—for example, weather, holidays, and tax payment dates. After seasonal adjustment, cyclical and other short-term changes in the economy stand out more clearly. Annual data is not seasonally adjusted.
The BEA explains, "For policymakers and businesses to better understand the economy and to formulate appropriate policies, up-to-date and accurate estimates of gross domestic product (GDP) are essential. BEA’s earliest GDP estimate—the “advance” estimate—is released roughly four weeks after the end of each quarter. The second and third estimates—which are released over the next two months—incorporate progressively more complete and more accurate source data as they become available from the Census Bureau, the Bureau of Labor Statistics, and other sources." [Source: BEA, www.bea.gov/faq/index.cfm?faq_id=1000 ]
"While there is always a trade-off between timeliness and accuracy, BEA believes that the early GDP estimates have struck an appropriate balance, as the magnitude of the revisions to the early estimates tends to be small." A study of the BEA's revision process found these trends>:A recent study published in July 2011 Survey of Current Business found the following:
- The revisions to long-term growth rates are small, averaging less than 0.1 percentage point for average growth rates over the comprehensive benchmark revisions between 1985 and 2009.
- There are no substantial revisions—as measured by the shares of GDP or GDI—to key measures, such as investment and government expenditures or the national saving rate.
- The revisions to the contributions of key components of GDP growth are small and do not substantially change the ordinal rankings of the components’ contributions to growth over expansions and contractions.
The overall pattern of change in GDP over business cycles is little changed by the revisions.
Source: "Revisions to GDP, GDI, and Their Major Components," Survey of Current Business, July, 2011. www.bea.gov/scb/pdf/2011/07%20July/0711_revisions.pdf
The 0.4 percentage point or 24 percent revision from the second estimate of 1.7 to the third estimate of 1.3 for Q2, 2012 was unusually large. Most revisions are not as large, but it does happen once in a while. On average, the BEA's GDP growth estimates are considered to be accurate.
"Seasonal adjustments remove recurring seasonal variations (variations that occur in the same month or quarter each year) from economic series so that the remaining movements in the series better reflect cyclical patterns in economic activity." This how the BEA explains the reason for seasonal adjustments to monthly or quarterly data.
"For example, consumer spending for jewelry always declines in January, after the Christmas buying season ends. Thus, the strength in spending for jewelry for any given January is not determined by whether it increases or decreases -- it always decreases -- but by whether it decreases more or less than “normal decrease.”
"Other examples of economic series affected by seasonal patterns include: Consumer spending for clothing and consumer electronics, which decreases each January after the Christmas season ends; automobile production, which drops in July, as factories retool for new models; heating oil production, which increases during September, as producers anticipate the winter heating season; and home construction, which increases in March, as weather conditions improve."
Source: BEA, Frequently Asked Questions, www.bea.gov/faq/index.cfm?faq_id=123
[Teacher Note: Ask your students: What are more examples of seasonal factors or regular events that consistently affect the monthly or quarterly data? (Holidays, school schedules, weather patterns, events (Super Bowl, World series, olympics, etc.) Students should be able to explain how these factors impact consumer or producer behaviors. Example: Some inductries are seasonal, such as outdoor construction that regularly slows during the winter months.]
What is the BEA?
The Bureau of Economic Analysis (BEA), an agency of the U.S. Department of Commerce, “prepares national, regional, industry, and international accounts that present essential information on such key issues as economic growth, regional economic development, inter-industry relationships, and the Nation's position in the world economy.” Source: BEA Mission Statement
[Note to teachers: NIPAs (national income and product accounts) are the BEA's economic measurements that “display the value and composition of national output and the distribution of incomes generated in its production.” Source: BEA Glossary ]
[Note to Teachers: Ask your students how they feel about the health of the U.S economy. Is it getting better? Worse? Is 1.7 or even 3 percent GDP growth enough when almost 13 million Americans are still unemployed and many more are underemployed?]
"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 1.3 percent in the second quarter of 2012 (that is, from the first quarter to the second quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent." (U.S. Bureau of Economic Analysis, Gross Domestic Product: Second Quarter 2012 (September 27, 2012.)
The BEA's estimate of U.S. real GDP growth fell from the 1.7 percent growth estimated in August to the final estimate of 1.3 percent. The difference is a total of $16 billion in output. If the final estimate is correct, the second estimate was 23.5 percent off. Measuring GDP, employment, prices, etc. is difficult?
One thing about he current estate of the U.S. economy is pretty clear. If unemployment is high, the economy will not be producing at its full or normal output. Since so many people are not working, their labor resources are not being used effectively. What is the relationship between unemployment and output?
In 1962, economist Arthur Okun theorized that there is a predictable relationship between unemployment and national output (GDP). Okun's Law correlates changes in real GDP and changes in the unemployment rate. He said that real GDP grows at about 3% per year when unemployment is normal.
For every point above 3.0 percent unemployment, the nation’s GDP decreases by 2%. And, it also works in reverse – each percentage point under 3.0 results in an additional 2 percent in GDP growth. For example, if the U.S. unemployment rate is 9.0 percent, 6.0 percent over the 3.0 average, GDP is reduced by 12 percent.
Many suggest that this historic relationship between unemployment and the “GDP gap” no longer exists – at least to the degree that Professor Okun suggested. The economy grew at a greater rate in late 2009, despite an even higher unemployment rate. The new concept is the “jobless recovery,” made possible by technology and greatly improved productivity.
Are we in a "new economy," one where the relationship between employment and output has changed?
Keep an eye on the employment and GDP data for the rest of the year.
The U.S. Central Intelligence Agency (CIA) “World Factbook” ranks the nations of the by various economic measures, including gross domestic product. The largest fifteen nations by GDP are listed below (rankings as of 2011).
Rank Country GDP (millions of US dollars)
1 European Union $15,390
2 United States $15,040*
3 China $11,300
4 India $4,463
5 Japan $4,389
6 Germany $3,085
7 Russia $2,373
8 Brazil $2,284
9 United Kingdom $2,250
10 France $2,214
11 Italy $1,826
12 Mexico $1,651
13 South Korea $1,559
14 Spain $1,411
15 Canada $1,389
* This figure differs from the GDP data in the lesson. The CIA uses different methodology to determine GDP. All figures are equated to U.S. dollars for comparison purposes.
In terms of total size of GDP, the U.S. ranks second, just behind the European Union nations’ total. (Estimates are for year 2011). See the CIA "Guide to Country Comparisons " webpage.
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.