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A Closer Look at the G.D.P.

As the end of the year approaches, it seems appropriate to look at the economy from a macro-perspective – that is, at the level of gross domestic product or G.D.P. – to determine if the economy is growing, and if so, what G.D.P. components are contributing to growth. While this is not a definitive analysis of the economy, it does show if things are moving in the right direction. All of the statistical information that follows is from the Bureau of Economic Analysis, or B.E.A., and is inflation-adjusted.

According to the National Bureau of Economic Research, the recession ended in June 2009, or the end of the second quarter of 2009. Since then, the U.S. economy has grown for 5 consecutive quarters at the following quarter to quarter rates: 1.6 percent, 5.0 percent, 3.7 percent, 1.7 percent and 2.5 percent. This is a median growth rate of 2.5 percent. The median growth rate for the first five quarters of the early 1990s and early 2000s expansions were 2.7 percent and 2 percent respectively, placing the growth rate of the current recovery right in the middle of the pack. This also indicates that slower growth at the beginning of a recovery is not atypical.

Personal consumption expenditures, or P.C.E.’s, are the largest component of G.D.P., comprising a little over 70 percent of growth. P.C.E.’s are simply “goods and services purchased by persons.” Starting in the third quarter of 2009, these have grown at the following per quarter rates: 2 percent, 0.9 percent, 1.9 percent, 2.2 percent, and 2.8 percent. This rate of growth is below the P.C.E. growth rate of previous expansions, which typically has been above 3 percent. However, considering U.S. consumers are currently “de-leveraging” (paying down debt) and are also concerned about high unemployment, this rate of growth is acceptable. Most importantly, total real P.C.E.’s are now higher than the highest level of the previous expansion. In the second quarter of 2008, total real P.C.E.’s were $9.326 trillion, while in the third quarter of 2010 they were $9.340 trillion.

Domestic investment comprises about 14 percent of U.S. G.D.P. Since the third quarter of 2009, this category of G.D.P. has increased at the following quarter to quarter growth rates: 11.8 percent, 26.7 percent, 29.1 percent, 26.2 percent and 12.4 percent. The primary reason for this growth has been a large increase in business and equipment investment, which has grown at a median rate of 16.8 percent since the third quarter of 2009. Both the commercial and residential real estate components of gross investment have been a net drag on this part of G.D.P. growth, which should come as no surprise as both areas of the economy were overbuilt in the last expansion. Finally, inventory restocking has also played a part in recent growth.

The export/import component of G.D.P. presents a classic “good news/bad news” scenario. The good news is U.S. exports have been growing for the last five quarters at a median quarter to quarter growth rate of 11.4 percent. The bad news is imports have been growing at a median rate of 16.8 percent. As the U.S. is still a net importer (in the latest G.D.P. report, real imports totaled $2.2 trillion while real exports totaled $1.7 trillion), the overall effect of this G.D.P. category is to subtract from overall growth.

At the macro level, the U.S. economy is clearly coming out of the recession. G.D.P. has grown for five straight quarters and several important components have contributed to growth. Consumers are spending again, although at lower levels than previous expansions, and businesses are investing in plant and equipment and restocking inventories. While the net export picture is still a drag on growth because of the U.S.’s position as a net importer, the growth in exports has clearly helped the domestic manufacturing sector. Ideally, we’d like to see growth clock in at a higher rate; however, the current rate of growth is consistent with the early quarters of the last two recoveries. Overall, the economy is doing far better than most people give it credit for.