This lesson focuses on the November 29, 2012, second estimate of U.S. real gross domestic product (real GDP) growth for the third quarter (Q3) of 2012, 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. The 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 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 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.
This lesson focuses on the BEA's second estimate of real GDP growth released on November 29, 2012, for the third quarter (Q3) of 2012 (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: During the first semester of the 2012-2013 school year (September-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 2012, the first estimate was made in October. The second estimate is made in November (THIS ESTIMATE). The third and final estimate for Q3 will be made in December.
GDP data reports lag the reporting period - the fiscal quarter. The current estimate is the second estimate for Q3 (July-September, 2012). Each of the three estimates for a quarter will include more comprehensive data and may modify the growth rate reported earlier.
[Teacher Note: Each Real GDP lesson will provide the most up-to-date data and focus on some specific topics or issues related to GDP. First semester 2012-2013 schedule:
- August 29, 2012 (second estimate for Q2 2012): How to read the data, real vs. nominal, and how the data is collected
- September 27, 2012 (third estimate for Q2 2012): Factors influencing the change in GDP, revisions, and seasonal adjustment
- October 26, 2012 (first estimate for Q3 2012): Business cycles and indicators of future growth (decline)
- November 29, 2012 (second estimate for Q3 2012): More details of GDP growth and U.S. regional comparisons.
- December 20, 2012 (third estimate for Q3 2012): Year-end summary.]
- Real GDP Growth. BEA second estimate of real GDP growth for Q3 2012. www.bea.gov/newsreleases/national/gdp/2012/gdp3q12_2nd.htm 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 November 29, 2012
On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers increased 0.1 percent in October after rising 0.6 percent in September. The index for all items less food and energy rose 0.2 percent in October after increasing 0.1 percent in September.
Total nonfarm payroll employment increased by 171,000 in October, and the unemployment rate was essentially unchanged at 7.9 percent. Employment rose in professional and business services, health care, and retail trade.
Real gross domestic product increased at an annual rate of 2.7 percent in the third quarter of 2012 (that is, from the second quarter to the third quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 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.
The U.S. economy grew at a slightly faster rate in the third quarter (Q3) of 2012 than had been previously estimated in October, and at a significantly faster rate than the previous quarter. Is this a sign of a more substantial economic recovery? Is this good news? Take a look at the BEA's second estimate of the performance of the U.S. economy in Q3 2012 and decide for yourself.
Note: Unless otherwise cited, all quoted materials in this lesson are directly from the November 29, 2012, Bureau of Economic Analysis news release of "National Income and Product Accounts - Gross Domestic Product, 3rd quarter 2012 (second estimate)" URL:
[Teacher Note: To introduce some of the key economics concepts related to GDP, you may want to show these video clips:
Council for Economic Education "Virtual Economics" videos:
- Gross Domestic Product, www.econedlink.org/interactives/index.php?iid=204
- Economic Growth, www.econedlink.org/interactives/index.php?iid=201
Real vs. Nominal, www.econedlink.org/interactives/index.php?iid=20
Khan Academy video programs:
The Business Cycle, www.khanacademy.org/finance-economics/macroeconomics/v/the-business-cycle
Gross Domestic Product: Third Quarter 2012 (Second Estimate)
U.S. Bureau of Economic Analysis
Released November 29, 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 2.7 percent in the third quarter of 2012 (that is, from the second quarter to the third quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent."
The second estimate for Q3 was 0.7 percentage point higher than the first estimated made in October. The BEA explained, "The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 2.0 percent (see "Revisions" on page 3 of the news release)."
Remember, the BEA issues three real GDP estimates each quarter, each based on new and more complete data. This is the second estimate for Q3 of 2012. The average revision from the advance estimate to the third estimate (two months later), has been about 0.6 percentage point.
Real GDP growth can also vary greatly from quarter to quarter during a year. In 2011, for instance, the economy grew at just a 0.4 percent rate in Q1 and increased to 1.3 percent in Q2 and 1.8 percent in Q3. The real GDP growth rate grew to 3.0 percent in Q4. The growth rate increase in each successive quarter over the year. The annualized real GDP growth rate in all of 2011 was just 1.7 percent.
[Teacher Note: Ask your students: Is the Q3 2012 real GDP growth rate good or bad in this context? (We may not know for sure until we see the real GDP growth rate for the next couple of quarters. Many experts suggest that a 2.5 to 3.0 percent real GDP growth rate is "normal.")]
[Teacher Note: Point out to students the problem of interpreting a big increase or decrease of GDP growth in one quarter as a "trend." 2011 is a good example of one quarter's growth being much greater than the other quarters. Was it a trend? (no)]
Figure 1, below, shows the U.S. quarterly real GDP growth rates from 1999 through Q3 of 2012. Note the real GDP negative growth in 2008 and the first half of 2009. This is the period that looks like the traditional definition of a recession. The Bureau of Economic Research identified the end of the recession as June, 2009, but did not do so until September 2010.
[Note to teachers: Students should be able to determine the recessionary periods during this time span. See the NBER "Business Cycle Dating Committee" announcement for the "official dates of recessions" on their Official Dates of Recessions and Recoveries page.]
Real GDP Growth in Q3 2012
Where did the Q3 2012 growth come from? The BEA reported, "The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, federal government spending, residential fixed investment, and exports that were partly offset by negative contributions from nonresidential fixed investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased slightly."
Growth in Q3 2012 was faster than growth in Q2. Why? The BEA noted, “The acceleration in real GDP in the third quarter primarily reflected upturns in private inventory investment and in federal government spending, a deceleration in imports, an acceleration in residential fixed investment, and a smaller decrease in state and local government spending that were partly offset by a downturn in nonresidential fixed investment and decelerations in exports and in PCE."
Note: The "increase or decrease" in real GDP from one quarter to the next is the measurement of the size of real GDP. "Acceleration or deceleration" refers to the change in the rate of growth or decline.
Key Industry Groups and Sectors in Q3 2012
The BEA usually specifically mentions automobile and comupter sales. These are critical indicators of growth or decline.
- Motor Vehicle Sales: "Motor vehicle output subtracted 0.24 percentage point from the third-quarter change in real GDP after adding 0.20 percentage point to the second-quarter change." Automobile sales slowed in Q3. Is this a good or bad sign?
- Computer Sales: "Final sales of computers added 0.12 percentage point to the third-quarter change in real GDP after subtracting 0.10 percentage point from the second-quarter change." Computer sales increased a little. Good or bad?
The four major component groups icluded in the determination of GDP are: personal consumption expenditures (C), Private Investment (I), net exports (X), and Goverment expenditures (G).
- Personal Consumption Expenditures: "Real personal consumption expenditures increased 1.4 percent in the third quarter, compared with an increase of 1.5 percent in the second. Durable goods increased 8.7 percent, in contrast to a decrease of 0.2 percent. Nondurable goods increased 1.1 percent, compared with an increase of 0.6 percent. Services increased 0.3 percent, compared with an increase of 2.1 percent."
- Nonresidential Fixed Investment: "Real nonresidential fixed investment decreased 2.2 percent, in contrast to an increase of 3.6 percent. Nonresidential structures decreased 1.1 percent, in contrast to an increase of 0.6 percent. Equipment and software decreased 2.7 percent, in contrast to an increase of 4.8 percent. Real residential fixed investment increased 14.2 percent, compared with an increase of 8.5 percent."
- Imports and Exports: "Real exports of goods and services increased 1.1 percent in the third quarter, compared with an increase of 5.3 percent in the second. Real imports of goods and services increased 0.1 percent, compared with an increase of 2.8 percent."
- Government Expenditures: "Real federal government consumption expenditures and gross investment increased 9.5 percent in the third quarter, in contrast to a decrease of 0.2 percent in the second. National defense increased 12.9 percent, in contrast to a decrease of 0.2 percent. Nondefense increased 3.0 percent, in contrast to a decrease of 0.4 percent. Real state and local government consumption expenditures and gross investment decreased 0.4 percent, compared with a decrease of 1.0 percent."
- Inventories: "The change in real private inventories added 0.77 percentage point to the third-quarter change in real GDP, after subtracting 0.46 percentage point from the second-quarter change. Private businesses increased inventories $61.3 billion in the third quarter, following increases of $41.4 billion in the second quarter and $56.9 billion in the first."
Investment decreased and inventories increased. Is this a sign of the reluctance of businesses to hire more workers and increase output?
[Teacher Note: Ask: What might these numbers mean for the future of the U.S. economy? (A decrease in private investment may nean slower future output.) Ask: Government expenditures increased in Q3. What does this mean?]
[Note to teachers: Students can look at the detailed GDP Data by Industries to identify how well the key industries in their city or region are doing.]
[Note to teachers: Ask your students why they think the BEA chooses to single out automobile sales and computer sales data. Why are these two products so important to understanding GDP growth? Automobile and computer sales are large, normally discretionary purchases.]
What was the U.S. current-dollar GDP at the end of Q3 2012?
"Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 5.5 percent, or $211.8 billion, in the third quarter to a level of $15,797.4 billion. In the second quarter, current-dollar GDP increased 2.8 percent, or $107.3 billion."
Current dollar estimates are expressed in today's prices. Chained dollar (real) estimates are adjusted for inflation using the price index for gross domestic purchases. The BEA press release explains, "The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.4 percent in the third quarter, 0.1 percentage point less than in the advance estimate; this index increased 0.7 percent in the second quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.1 percent in the third quarter, compared with an increase of 1.4 percent in the second."
[Note to teachers: Make sure your students are clear about the difference between the nominal (current) dollar GDP and the chained (real) GDP measurements. For a different way to introduce the determination of GDP and real GDP, use the "Khan Academy" online eight minute video on "Real GDP and Nominal GDP." URL:
[Note to Teachers: Ask your students: What is the U.S. per capita GDP?. [Divide the current dollar GDP by the U.S. population. $15,797,400,000,000 divided by (approx.) 315,000,000 = $50,150. (November, 2012 population data)]
NOTE: You can find the U.S. Current Dollar and Real GDP figures since 1929 on this BEA table.
U.S. Regional and State Real GDP Data
The BEA releases annual GDP data for eight U.S. regions, the fifty states, and metropolitan areas. The most recent state and regional data was released June 5, 2012. The current regional and state GDP release is through the year 2011.
"Widespread Economic Growth Across States in 2011"
"Real gross domestic product (GDP) increased in 43 states and the District of Columbia in 2011, according to new statistics released today by the U.S. Bureau of Economic Analysis (BEA) that breakdown GDP by state. Durable–goods manufacturing, professional, scientific, and technical services, and information services were the leading contributors to real U.S. economic growth. U.S. real GDP by state grew 1.5 percent in 2011 after a 3.1 percent increase in 2010."
Source: U.S. Bureau of Economic Analysis news release, "Widespread Economic Growth Across States in 2011," June 5, 2012. URL: www.bea.gov/newsreleases/regional/gdp_state/gsp_newsrelease.htm. Unless otherwise cited, quoted materials in this section of the lesson are from the BEA's June 5, 2012, news release.
Figure 2, below shows the map of the eight U.S. regions, with the percent change in real GDP by state. Note the states with the highest growth rates (dark blue) and the states with the slowest growth rates (gold). Within each region, the state growth rates vary.
GDP and GDP Growth Rates by U.S. Region, 2011
Figure 3, below, lists the gross domestic product of the U.S. regions and their regional real GDP growth rates in 2011. Note the significant differences between the regions, due to their size and population.
The BEA commented on the 2011 GDP growth rates among regions. "Real GDP increased in all eight BEA regions in 2011, although growth slowed in most regions. The Far West (2.1 percent) was the only region where growth accelerated. The Southwest region grew the fastest (2.7 percent), led by Texas with a 3.3 percent increase."
[Teacher Note: Students can compare their state or region to other states and regions. What factors may have influenced the pace or growth in their state or region? What industries are growing or declining in their state or region?]
What led the regional GDP growth?
"Durable-goods manufacturing was the largest contributor to U.S. real GDP by state
growth in 2011. This industry increased 7.9 percent in 2011, after increasing 17.0 percent
in 2010. It was the leading contributor to real GDP growth in six of the eight BEA regions
and in 26 states. Durable-goods manufacturing contributed 3.94 percentage points to
growth in Oregon and 1.17 percentage points to growth in Michigan."
State Per Capita GDP
"Per capita real GDP by state in 2011. Per capita real GDP ranged from a high of
$63,159 in Delaware to a low of $28,293 in Mississippi. Per capita real GDP for the U.S.
was $42,070 (2011)."
U.S. real gross domestic product increased at an annual rate of 2.7 percent in the third quarter of 2012. Real GDP had increased by 1.3 percent in the second quarter. Despite this growth, the U.S. unemployment rate remains historically high at just less than 8 percent. Is this a sign of real recovery?
As evidenced by the rates of GDP growth in the various states (figure 3), the pace of economic recovery varies greatly from one area to another, but all of the U.S. regions grew in 2011. The Southwest and Far West led the U.S. in regional GDP growth.
Keep an eye on the December (final) estimate of real GDP growth for Q3 2012 for a more complete picture of U.S. economic growth and recovery.
[Teacher Note: Ask your students what they think will happen to U.S. real GDP growth in the last quarter of 2012.]