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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 first (advance) estimate of real GDP growth released on April 30, 2010, for the first quarter  of 2010 (January-March.)  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.

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

The U.S. economy grew in the first quarter of 2010, but not quite at the rate of growth during the fourth quarter of 2009.  Is this good news or bad news?  Take a look at the performance of the economy in early 2010 and decide for yourself.

U.S. Bureau of Economic Analysis

Gross Domestic Product: First Quarter 2010 (Advance Estimate)

“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 3.2 percent in the first quarter of 2010, (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 5.6 percent.”

“The Bureau emphasized that the first-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 first quarter, based on more complete data, will be released on May 27, 2010.”  Remember, the BEA issues three real GDP reports each quarter.  This is the first report for Q1 2010. 

The estimates of real GDP growth can change significantly from the first (advance) to the third (final) estimate.  For instance, the first estimate for Q4 2009 released in January 2010 was 5.6 percent growth.  The second estimate in February was that growth was 5.9 percent.  By the third (final) estimate

In March was 5.7 percent.  As explained by the BEA, estimates can change as new data is determined that confirms or revises previous data.  The BEA and other typically sort data falls into three general categories – leading, concurrent and lagging indicators.  Estimates based on leading and concurrent indicators can be altered based on lagging indicators. 

The Conference Board, a global non-profit  independent membership organization 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 Conference Board tracks a variety of Global Business Cycle Indicators and regularly publishes analyses of the data.

Figure 1, below, shows the U.S. quarterly real GDP growth rates from 1999 through Q1 of 2010.   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.  Despite real GDP growth in late 2099 and early 2010, the NBER has yet to declare the “official” end of the recession.   The NBER decision will be discussed later in this lesson.

 GDP Figure 1

Real GDP Growth in Q1 2010

Where did the Q1 growth come from? “The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, and nonresidential fixed investment that were partly offset by decreases in state and local government spending and in residential fixed investmentImports, which are a subtraction in the calculation of GDP, increased.”

Growth in Q1 was slower than Q4 2009.  Why?  “The deceleration in real GDP in the first quarter primarily reflected decelerations in private inventory investment and in exports, a downturn in residential fixed investment, and a larger decrease in state and local government spending that were partly offset by an acceleration in PCE and a deceleration in imports.”

Key Industries

  • Motor Vehicles:  “Motor vehicle output added 0.52 percentage point to the first-quarter change in real GDP after adding 0.45 percentage point to the fourth-quarter change.”  
  • Computers:  “Final sales of computers added 0.19 percentage point to the first-quarter change in real GDP after adding 0.01 percentage point to the fourth-quarter change.”
  • Personal Consumption Expenditures:  “Real personal consumption expenditures increased 3.6 percent in the first quarter, compared with an increase of 1.6 percent in the fourth.  Durable goods increased 11.3 percent, compared with an increase of 0.4 percent.  Nondurable goods increased 3.9 percent, compared with an increase of 4.0 percent.  Services increased 2.4 percent, compared with an increase of 1.0 percent.”
  • Nonresidential Fixed Investment:  “Real nonresidential fixed investment increased 4.1 percent in the first quarter, compared with an increase of 5.3 percent in the fourth.  Nonresidential structures decreased 14.0 percent, compared with a decrease of 18.0 percent.  Equipment and software increased 13.4 percent, compared with an increase of 19.0 percent.  Real residential fixed investment decreased 10.9 percent, in contrast to an increase of 3.8 percent.”
  • Imports and Exports:  “Real exports of goods and services increased 5.8 percent in the first quarter, compared with an increase of 22.8 percent in the fourth.  Real imports of goods and services increased 8.9 percent, compared with an increase of 15.8 percent.”
  • Government Expenditures:  “Real federal government consumption expenditures and gross investment increased 1.4 percent in the first quarter, compared with no change in the fourth.  National defense increased 1.2 percent, in contrast to a decrease of 3.6 percent.  Nondefense increased 1.7 percent, compared with an increase of 8.3 percent.  Real state and local government consumption expenditures and gross investment decreased 3.8 percent, compared with a decrease of 2.2 percent.”
  • Inventories:  “The change in real private inventories added 1.57 percentage points to the first-quarter change in real GDP after adding 3.79 percentage points to the fourth-quarter change.  Private businesses increased inventories $31.1 billion in the first quarter, following decreases of $19.7 billion in the fourth quarter and $139.2 billion in the third.”  “Real final sales of domestic product -- GDP less change in private inventories -- increased 1.6 percent in the first quarter, compared with an increase of 1.7 percent in the fourth.”

 Disposition of Personal Income

  • Income: “Current-dollar personal income increased $115.1 billion (3.9 percent) in the first quarter, compared with an increase of $92.5 billion (3.1 percent) in the fourth.”
  • Taxes:  “Personal current taxes increased $73.3 billion in the first quarter, in contrast to a decrease of $1.9 billion in the fourth.”
  • Disposable Income:  “Disposable personal income increased $41.7 billion (1.5 percent) in the first quarter, compared with an increase of $94.4 billion (3.5 percent) in the fourth.  Real disposable personal income was unchanged in the first quarter, compared with an increase of 1.0 percent.”
  • Spending:  “Personal outlays increased $130.4 billion (5.0 percent) in the first quarter, compared with an increase of $96.5 billion (3.7 percent) in the fourth.  Personal saving -- disposable personal income less personal outlays -- was $340.8 billion in the first quarter, compared with $429.3 billion in the fourth.”
  • Saving: “The personal saving rate -- saving as a percentage of disposable personal income -- was 3.1 percent in the first quarter, compared with 3.9 percent in the fourth.”

What is the Current-dollar GDP?

$14,601,400,000,000,000

Current-dollar GDP -- the market value of the nation's output of goods and services – increased 4.1 percent, or $147.6 billion, in the first quarter to a level of $14,601.4 billion.  In the fourth quarter, current-dollar GDP increased 6.1 percent, or $211.7 billion.

Current dollar estimates are expressed in current 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 1.3 percent in the third quarter, 0.1 percentage point less than the second estimate; this index increased 0.5 percent in the second quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 0.3 percent in the third quarter, compared with an increase of 0.8 percent in the second.” Much of the price index for GDP change in Q3 was energy prices.

 

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

Summary of Recent Economic Data through Q3 2009

Figure 2, below, shows the values of the sectors of U.S. GDP in Q1 2010 in current (nominal) dollars and in chained dollars (adjusted for inflation. Note that personal consumption expenditures were, by far, the largest percentage of GDP (almost 70 percent).   Although imports and exports are a relatively small percentage of the U.S. economy, their decreases show that problems in the United States impact the world economy and foreign economic problems impact the U.S. 

 

Figure 2:  U.S. Gross Domestic Product
1st Quarter 2010

(Final estimates in $ billions)
  Current
Dollars

(nominal)
Chained Dollars
(adjusted for
inflation)
Gross Domestic Product 14,601.40 13,254.7
Personal Consumption
Expenditures
10,367.10 9.372.7
Private Investment 1,762.9 1,677.8
Net Exports -503.8 -367.0
Government Expenditures 2,975.2 2,565.3
Change and Percent from Q4 2009 to Q1 2010
Gross Domestic Product 105.2 +3.20%
Personal Consumption
Expenditures
83.2 +2.55%
Private Investment 56.8 +1.67%
Exports 22.0 +0.66%
Imports 41.0 -1.28%
Government Expenditures -11.6 +0.37%

Since the declaration of the current recession by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee in December 2008 (citing that the recession began a year earlier in December 2007), U.S. economic conditions worsened considerably in 2009 and , more recently have shown signs of recovery. GDP growth (despite the popular belief) is not the NBER’s sole determinant of a recession.  The popular belief is that a recession is two consecutive quarters of zero or negative real GDP growth.

The NBER defines a recession this way…

"A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.

The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. This series (data report) reached a peak in December 2007 and has declined every month since then."

Source: Business Cycle Dating Committee, National Bureau of Economic Research, report on “Determination of the December 2007 Peak in Economic Activity ,” December 11, 2008.

What Happened During the Recession?

  • Increased unemployment. When consumer or business spending decreases, the demand for labor decreases.  Employment may lag recovery efforts, as it takes time for employers to increase output and create jobs. 
  • Decreasing investment. When firms expect less demand for their goods and services, they will cut costs and not invest in productive capacity. Investment spending decreased almost forty percent in the last quarter. 
  • Lower stock market prices. If the recession results in lower corporate profits and uncertainty about future values, stock prices may fall. As investors sense a recovery, stock prices may rise and be an indicator of a better economy in the future. Remember, stock prices do not always follow the general economic trends.
  • Increased government spending and budget deficits. Decreased output and employment leads to lower tax revenues (income tax, sales tax, corporation taxes, etc.). Some government programs, such as unemployment compensation will increase. More government borrowing will mean higher more debt to repay and higher taxes in the future
  • Lower price level. Reduced spending typically results in less price pressure. The result is a lower rate of inflation.  Greater problems will occur if prices fall – deflation. A recession may put pressure on firms to reduced prices to compete. Lower prices and profits are a disincentive to invest and increase output. 

Look at the following data about the performance of the U.S. economy since the beginning of the current recession (Figure 3, below).  Notice the relationships of real GDP growth, payroll employment (the NBER's key data) and the unemployment rate. CPI data has been included because it is also the subject of monthly "Focus on Economic Data" lessons.

  • What trends do you see in the four data sets?
  • What generalizations can you make about the trends of the four data sets?
  • Are the real GDP growth and payroll employment trends related?
  • Are the real GDP growth and unemployment rate trends related?
  • Are the payroll employment and unemployment rate trends related?
  • Is the trend of the CPI-U related to the real GDP growth and payroll employment data?
  • Is the trend of the CPI-U related to the real GDP growth and payroll employment data?
  • If you were a member of the NBER "Business Cycle Dating Committee, would you argue that we are still in a recession?

GDP Figure 3

CONCLUSION

Let's review the highlights of the Q1 2010 growth compared to Q4 of 2009.


PCE
(Personal consumption expenditures) increased 3.6 percent in Q1, compared with an increase of 1.6 percent in Q4. The biggest increase in this category was in durable goods, where consumption increased 11.3 percent in Q1, compared with an increase of just 0.4 percent in Q4. 

Real nonresidential fixed investment increased 4.1 percent in the first quarter, compared with an increase of 5.3 percent in the fourth.  Most categories were consistent quarter to quarter, except housing (residential fixed investment) that decreased 10.9 percent in Q1, compared to an increase of 3.8 percent in Q4.

Real exports of goods and services increased 5.8 percent in the first quarter in Q1, but real imports increased even more at 8.9 percent.

Nondefense federal government spending increased 1.7 percent in Q1, compared with an increase of 8.3 percent in Q4.

Real private inventories added 1.57 percentage points to the Q1 change in real GDP after adding 3.79 percentage points to the Q4. 

Growth in Q1 of 2010 was slower, but still at a pace consistent with U.S. long-term GDP growth.  Slower growth may be a better sign of stability, but it will mean that recovery from previous output losses will take longer.

Which do you think will be better - fast growth and faster recovery, or slower growth?  There may be a trade-off between growth and stability.

ASSESSMENT ACTIVITY

Next, complete the essay question below on the interactive notepad.

 

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

EXTENSION ACTIVITY

The U.S. Central Intelligence Agency (CIA) “World Factbook” ranks the nations of the by various economic measures, including gross domestic product. The “top ten” nations in the current edition are listed below. [NOTE: The CIA GDP data is reported using “purchasing power parity” a process that determines the relative values of two currencies. It equates the purchasing power of various nations’ currencies and lists them as equivalent to U.S. dollars.] 

Rank

Country

Per Capita GDP

 

1

Lietchtenstein

$122,100

2007 est.

2

Qatar

$121,700

2009 est.

3

Luxembourg

$78,000

2009 est.

4

Bermuda

$69,900

2004 est.

5

Norway

$58,600

2009 est.

6

Jersey

$57,000

2005 est.

7

Kuwait

$54,100

2009 est.

8

Singapore

$50,300

2009 est.

9

Brunei

$50,100

2009 est.

10

Faroe Islands

$48,200

2008 est.

11

United States

$46,400

2009 est.

       

 In terms of total size of GDP, the U.S. ranks second, just behind the European Union nations’ total:

Rank

Country

GDP

 

1

European Union

$14,510,000,000,000

2009 est.

2

United States

$14,260,000,000,000

2009 est.

3

China

$8.789,000,000,000

2009 est.

4

Japan

$4,137,000,000,000

2009 est.

5

India

$3,560,000,000,000

2009 est.

6

Germany

$2,811,000,000,000

2009 est.

7

United Kingdom

$2.149,000,000,000

2009 est.

8

Russia

$2,116,000,000,000

2009 est.

9

France

$2,110,000,000,000

2009 est.

10

Brazil

$2,025,000,000,000

2009 est.

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.