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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 November 24, 2009, for the third quarter (July - September) of 2009. Understanding the level and rate of growth of the economy's output (GDP) helps to better understand growth, employment trends, the health of the business sector, and consumer well-being. 

[NOTE: The BEA previously used the terms "advance, preliminary and final" to identify the three quarterly real GDP estimates. The terms "advance, second and third" are now used in the 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:

  • September (third estimate for Q2 2009): How to read the data, real vs. nominal, and how the data is collected
  • October (advance estimate for Q3 2009): Factors influencing the change in GDP, revisions, and seasonal adjustments
  • November (second estimate for Q3 2009): Business cycles and indicators of future growth (decline)
  • December (third estimate for Q3 2009): Year-end summary and GDP-related current issues

TASK

  • 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.

PROCESS

U.S. Bureau of Economics Analysis: Second Estimate of U.S. Real GDP Growth for the Third Quarter of 2009, released November 24, 2009.

“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 2.8 percent in the third quarter of 2009, (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 decreased 0.7 percent.”

The “advance” estimate of real GDP growth for Q3 that was released in October indicated a real GDP increase of an annual rate of 3.5 percent. The second estimate (November 24) reduced the estimated growth rate to 2.8 percent, after analyzing additional data. Revisions of estimates over the three-month quarterly reporting period are not unusual. The BEA added this comment about revisions, “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 3.5 percent.”

The BEA announcement identified the sectors of increase and decrease in determination of the Q3 GDP.

Positive contributors:  

  • Personal consumption expenditures (+ 2.9 percent)
  • Motor vehicles (+ 1.45 percent)
  • Exports (+ 17.0 percent)
  • Private inventory investment (+ 0.87 percent)
  • Federal government spending (+ 8.3 percent)
  • Residential fixed investment (+ 19.5 percent)

Negative contributors:

  • Nonresidential fixed investment (- 4.1 percent)
  • Nonresidential structures (- 15.1 percent)
  • Imports (a subtraction in the calculation of GDP) (+ 20.8 percent)
  • State and local government spending (- 0.1 percent)

Revisions from the Advance (October) to the Second (November) Q3 GDP Growth Estimates

According to the BEA announcement, “The second estimate of the third-quarter increase in real GDP is 0.7 percentage point lower, or $23.7 billion, than the advance estimate issued last month, primarily reflecting an upward revision to imports and downward revisions to personal consumption expenditures and to nonresidential fixed investment that were partly offset by an upward revision to exports.” 

 

 

Advance
(October)

Second
(November)

Real GDP

3.5%

2.8%

Current-dollar GDP

4.3%

3.3%

Gross Domestic Purchases Price Index

1.6%

1.4%

According to the BEA, “Most GDP revisions result from the incorporation of new or revised source data that were not available at the time of the earlier estimates. In addition, annual revisions to quarterly estimates include the effects of periodic improvements in estimation methods that are necessary to keep the GDP attuned to the changing economy. Methodological improvements typically are put in place as part of once-every-five-year “comprehensive” GDP revisions. The most recent such revision, in 2003, yielded long-run growth rates of current-dollar and real GDP, measured from 1930-2002, that were virtually the same as the pre-revision growth rates.” In 2010, all national, state and metropolitan area GDP figures will be revised to reflect a common base year period.”

Figure 1, below, shows the monthly changes in real GDP from 1990 through Q3 2009, including the revision for Q3. Note the 1990-91 and 2001 recessions with periods of negative GDP growth.

Figure 1 GDP

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.”

“In October, the price index for gross domestic purchases increased 1.4 percent in the third quarter, 0.2 percentage point less than in the advance estimate; this index increased 0.5 percent in the second quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 0.4 percent in the third quarter, compared with an increase of 0.8 percent in the second.”

The figure below shows the current dollar and constant dollar GDP data form 2000 to Q3 2009. The difference is the rate of inflation.  *These figures are in billions of U.S. dollars. Figures for 2000 through 2008 are the final annual estimates. 

 

Current & Constant Dollar GDP Growth Estimates
2000 - 2009 (Q3)

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

14,077.6

13,254.1

2008

14,441.4

13,312.2

2009 Q1

14,178.0

12,925.4

2009 Q2

14,151.2

12,901.5

2009 Q3

14,266.3

12,990.3

Additional GDP data in October 2009

Gross domestic purchases, which are purchases by U.S. residents of goods and services, wherever they are produced, increased 3.5 percent in the third quarter.   Note that gross domestic purchases increased at a greater rates than real GDP. Imports increased 20.8 percent.

Gross national product, the goods and services produced by the labor and property supplied by U.S. residents -- increased 3.8 percent in the third quarter, in contrast to a decrease of 1.0 percent in the second. GNP includes, and GDP excludes, net receipts of income from the rest of the world, which increased $31.6 billion in the third quarter after decreasing $7.4 billion in the second; in the third quarter, receipts increased $7.1 billion, and payments decreased $24.5 billion. GNP includes foreign transactions.

The current-dollar GDP, the market value of the nation's output of goods and services, increased 3.3 percent, or $115.1 billion, in the third quarter to a level of $14,266.3 billion. In the second quarter, current-dollar GDP decreased 0.8 percent, or $26.8 billion. This is the GDP growth without adjustment for inflation.

When announcing GDP, the BEA also announces data on corporate profits.

Corporate Profits. Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $130.0 billion in the third quarter, compared with an increase of $43.8 billion in the second quarter. Current-production cash flow (net cash flow with inventory valuation adjustment) -- the internal funds available to corporations for investment -- increased $41.6 billion in the third quarter, in contrast to a decrease of $30.5 billion in the second.

The good news is that corporate profits increased. During the quarter, employment declined and the unemployment rate increased, but productivity improved. Corporations are cutting costs and improving production processes that result in great profits.

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. Recessions, a "significant decline in economic activity spread across the economy, lasting more than a few months," are 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 GDP “fell slightly in 2007 Q4, rose slightly in 2008 Q1, rose again in 2008 Q2, and fell slightly in 2008 Q3…the currently available estimates of quarterly aggregate real domestic production do not speak clearly about the date of a peak in activity.” 
  • 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.”

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

 

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 November 19, 2009.

"The Conference Board Leading Economic Index™ (LEI) for the U.S. decreased 0.4 percent, The Conference Board Leading Economic Index™ (LEI) for the U.S. increased 0.3 percent in October, following a 1.0 percent gain in September, and a 0.4 percent rise in August.”

“The Conference Board Coincident Economic Index™ (CEI) for the U.S. was unchanged in October, following a 0.1 percent decline in September, and a 0.1 percent increase in August.”

“The Conference Board Lagging Economic Index™ (LAG) declined 0.2 percent in October, following a 0.5 percent decline in September, and a 0.4 percent decline in August.”

Conference Board economist Ataman Ozyildirim commented on the recent data, “After half a year of consecutive increases, the month-to-month growth of the LEI is stabilizing and the gains continue to be broad-based. Meanwhile, the coincident economic index has been essentially flat since June, after declining since November 2007. The composite indexes suggest the recovery is unfolding and economic activity should continue improving in the near term.”

Business Cycle Indicators Details – From the Conference Board November 19, 2009 Press Release

“The Conference Board LEI for the U.S. increased for the seventh consecutive month in October. The interest rate spread, initial unemployment claims (inverted) and stock prices contributed positively to the index this month, more than offsetting declines in consumer expectations, residential building permits and the index of supplier deliveries. The six-month change in the index stands at 5.0 percent (a 10.2 percent annual rate) for the period through October 2009, up from -0.7 percent (a -1.4 percent annual rate) for the previous six months. In addition, the strengths among the leading indicators have remained widespread in recent months.”

“The Conference Board CEI for the U.S. was unchanged in October, with employment continuing to fall and industrial production rising slightly. Between April and October 2009, the index decreased 0.7 percent (a -1.4 percent annual rate), slower than the decline of 4.1 percent (a -8.0 percent annual rate) for the previous six months. In October, the lagging economic index decreased again, and with the coincident economic index remaining unchanged, the coincident–to-lagging ratio increased further. Meanwhile, real GDP expanded at a 3.5 percent annual rate in the third quarter, its first increase since the second quarter of last year.”

“After having fallen steadily since mid-2007, The Conference Board LEI for the U.S. has risen for more than half a year now, appearing to have reached a trough at the end of the first quarter. Meanwhile, The Conference Board CEI for the U.S. has been essentially flat since June, after generally declining since November 2007. All in all, the behavior of the composite indexes suggests that the recession is bottoming out and that economic conditions will continue to improve in the near term.”

Summary of the October 2009 indicators

Six of the ten indicators that make up The Conference Board LEI for the U.S. increased in October. The positive contributors – beginning with the largest positive contributor – were the interest rate spread, average weekly initial claims for unemployment insurance (inverted), stock prices, average weekly manufacturing hours, real money supply* and manufacturers’ new orders for consumer goods and materials*. The negative contributors – beginning with the largest negative contributor – were index of consumer expectations, building permits, index of supplier deliveries (vendor performance), and manufacturers’ new orders for non-defense capital goods*.

For more information on economic indicators, go to the "Business Cycle Indicators Handbook ," produced by The Conference Board. The leading, coincident and lagging indicators are explained on page 13.

The various cyclical indicators used by the Conference Board are classified into three categories—leading, coincident, and lagging, based on their timing in relation to the business cycle. 

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

Leading Indicators:

  • 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

Coincident Indicators:

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

Lagging 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 (%) 

Students: Which of these indicators do you think are most meaningful for you, your family and your community? 

Current Economic Policy Goals

Recent government policy decisions to stimulate the economy are aimed at stimulating one or more of the components - consumer spending, investment, government spending or exports. The overall goal is to stimulate aggregate demand.   Aggregate demand is the total amount of goods and services demanded in the economy at a given overall price level and in a given time period. It is represented by the aggregate-demand curve, which illustrates the relationship between price levels and the quantities of output that are demanded. Aggregate demand can also be called total spending.  

Aggregate demand can also be illustrated by the formula AD = C + I + G + (X-M):

    C  = Consumers' expenditures on goods and services
     I   = Investment spending by companies on capital goods
    G = Government expenditures on publicly provided goods and services
    X  = Exports of goods and services
    M = Imports of goods and services

By direct government spending, creating jobs, promoting investment, and increasing output, employment is increased and income is created.  As those with new jobs earn income, they increase their spending - increasing aggregate demand.  The $787 billion federal stimulus (American Recovery and Reinvestment Act of 2009) is intended to do just that.

For more information about the goals and impact of stimulus programs, go to Recovery.Gov , the U.S. government’s official website providing easy access to data related to Recovery Act spending.

CONCLUSION

The November 24 second BEA's estimate of real GDP growth for the third quarter of 2009 was revised downward by 20%, from the advance estimate of 3.5 percent growth rate to a 2.8 percent rate of growth.  The BEA will announce the final estimate of GDP growth for the third quarter December 22nd.  Changes to the estimate were the result of new and/or more detailed information, often provided by lagging indicators that confirm or clarify the leading and concurrent indicators used to make initial estimates.

Does this mean the recession that began in December 2007 is over?  If GDP growth continues the NBER may look back to Q3 as the turning point.  Then again, the NBER may wait to see if there is improvement in payroll employment to identify the recession's end. 

If the recent growth is the result of federal stimulus programs - such as the first-time homebuyers tax credits and the "cash for clunkers" automobile purchase programs - will those gains be short-term and will GDP drop back to its lower level?  Stimulus programs were intended to create jobs that create income, and increase consumer demand and private investment. 

The December "final" estimate of real GDP growth may confirm the November estimate of 2.8 percent growth, or it may be revised - slightly upward or downward.    The key will be if there has been additional growth in Q4 (October through December).  Look for he first Q4 estimate in January, 2910.   If real GDP declines again in Q4, the recession may continue for some time.  Either way, we may have to wait until these is some positive employment growth to see the beginning of real economic recovery.

ASSESSMENT ACTIVITY


1.  Why does the BEA announce the GDP data for a quarter in three following months (advance, preliminary and final announcements)?

EXTENSION ACTIVITY

Take another look at the list of "Leading Economic Indicators" from the lesson.  Which indicators do you think are the best indicators of the future health of the 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.

Search for "index of leading indicators."

Here is a link to the Conference Board press release on Global Business Cycle Indicators .