Understanding the U.S. GDP

This essay will provide an overview of the Gross Domestic Product (GDP) of the United States, Subsequent essays will provide more detail on the components of U.S. GDP.

The GDP is an attempt by the Bureau of Economic Analysis (BEA) to measure the value of final goods and services produced in the US in a given period of time (see here for a pdf primer by the BEA that explains the GDP as well as other measures of economic activity).

A few key points: GDP measures mostly market production, that is activities that people pay for (leading to the old economist joke that if a man marries his housekeeper-or a woman marries her accountant-it will result in a decrease in the GDP). GDP measures production, not sales. GDP also tries to capture the services generated by owner-occupied housing. The idea here is that when one rents a house the BEA can measure the service flow (the apartment produces, say, $800 of services a month), but unlike the housekeeper/accountant example above, when the renter buys his apartment the BEA tries to continue to measure the service flow. The BEA does this by estimating the rent on comparable housing and imputing (or attributing) the income to homeowners. In other words, BEA counts the rent payments that homeowners would have paid as part of the GDP.

The BEA estimated that the US GDP (see here for the BEA’s latest release) was around $14,250 billion in the second quarter of 2008 (see Table 1.1.5 here where GDP is measured in current Dollars). This number is “seasonally adjusted annual rates” or SAAR, meaning that if the whole year were like the second quarter then the total GDP for the year would have been $14,250 billion, or that quarterly GDP was roughly 1/4 of that figure.

The GDP is calculated both in current dollars and in “chained” year 2000 Dollars. “Chained” Dollars represent the BEA’s attempt to remove inflation from the calculation and express GDP in so called real terms; this is a complex theoretical and statistical effort (see here for BEA’s introduction of the chained data). When analysts speak of economic growth they usually refer to real or chained data, so that they ignore the effects of price changes and focus on changes in quantities.

Using the expenditures approach to GDP (familiar from Introductory Macroeconomics), GDP is equal to the sum of consumption plus investment plus government spending plus net exports (exports minus imports). I briefly discuss here the data as they appear in the GDP report and how the data are released to the public. Linked essays will discuss these data in more detail.

Consumption of goods and services is revealed in two parts: first retail sales (see my discussion here), which represents an estimate of the goods part (28% of GDP in the second quarter of 2008); personal consumption expenditures (monthly consumption of goods and services, 70% of GDP) comes out about ten days later. Goods consumption tends to be more variable than services consumption, so much of the information in PCE is already known before the release. Consumption as a whole is not highly variable but is important due to its size; many analysts have made erroneous forecasts predicting the collapse of the US consumer.

Investment is divided into three categories: nonresidential (companies buying equipment and buildings); residential (home construction) and change in inventories. There are multiple sources for these data; survey data is produced more quickly but measures of spending are more accurate. Important releases include housing starts, construction spending, durable goods, factory orders and business inventories. Investment is a smaller component than consumption (15% of GDP) but is more variable; untangling these reports is hard work, and a way that careful analysts distinguish themselves from the pack.

Government expenditure: the Monthly Treasury Statement gives the monthly spending (and revenue) numbers for the US (Federal) government (7% of GDP); the problem is that much of the government budget is transfer programs (such as social security) that do not directly enter the GDP; further, these data are missing the spending by state and local governments (12% of GDP).

Net exports: Trade reports come out much later than other data; for example, June trade data are released in August. Net exports is a relatively small component of GDP (-5.1% of GDP) but can be highly variable; when advance (the first estimate) GDP comes out, only two months of trade have been released, and the BEA actually forecasts the third month of trade in producing their GDP estimate. These numbers are difficult to forecast. Note that in recent years imports have been larger than exports, so net exports are negative and subtract from total GDP.

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