According to The World Fact Book at the Central Intelligence Agency, the United States economy ranked the second largest economy in the world. This essay sets out to analysis the real gross domestic product (GDP) of the United States from fiscal year 2004 to quarter one (Q1) of year 2009 so as to better understand the U.S. economic growth, contributors to U.S real GDP and the effects of the U.S. financial crunch from year 2007 to present. The essay will conclude that there may be no solutions to the problems of the U.S. economy that won’t involve some pain and that government intervention – stimulus, direct control of large banks and automobile manufacturers, and more control of financial markets, may or may not be the answer. Only time will tell.
U.S. Real GDP as of FY 2008
According to the statistics from U.S. Bureau of Economic Analysis (BEA), U.S. real GDP– the output of goods and services produced by labour and property in the United Sates – overall increased by $976.2 billions of chained (2000) dollars from fiscal year 2004 to fiscal year 2008, and reduced by $291.5 billions of chained (2000) dollars by Q1 of year 2009 (Table 1.0, Chart 1.0).
According to Balakrishnan (28 August 2008), the government data showed that the economy expanded by an annualized rate of 3.3% in the three months to June 2008 due to robust consumer spending and net exports. This was much higher than the 1.9% pace that was first reported and the fastest rate in nearly a year.
On the other hand, Balakrishnan (2008) reported that the growth in the first quarter of 2008 is sluggish, almost flat, after a 0.2% contraction in the last quarter of 2007, which was the weakest rate since 2001 and sparked predictions that the U.S. economy was set for a recession in 2008.
Most of the growth reported in quarter two of 2008 came from higher overseas demand, rather than domestic strength. Exports grew at a hefty 13.2% annual rate instead of the 9.2% pace initially estimated, as foreign buyers snapped up cheap US goods thanks to a weakened U.S. dollar.
Meanwhile, consumer spending, which underpins two-thirds of the U.S. economy, grew at an upwardly revised 1.7% annual rate rather than the 1.5% first reported, after tax rebates of up to $600 spurred shoppers who had cut back amid the economy’s problem. In 2008, seventy-two percent of the economic activity in the U.S. came from consumers (TIME, 2008).
However, Gary Pollack at Deutsche Bank commented that the outlook for the economy was still bleak as consumer confidence remained low and the housing market was still grinding lower. The outlook for third quarter growth of 2008 was less than 1%, so he still had a negative outlook (Balakrishnan, 2008).
True enough, U.S. real GDP dipped by $291.5 billions of chained (2000) dollars by quarter one of year 2009. To understand the factors of the declined in U.S. real GDP, we will focus on the BEA “preliminary” estimates released June 2009, for the first quarter (January, February and March) of 2009.
The 2008-2009 recession continues
An estimated negative 5.7% GDP growth for the first quarter of 2009 confirms that the recession that began in December 2007 has not yet ended. Is it getting better or worse? The decline in GDP of 5.7% in Q1 2009 was slightly smaller than the decline of 6.3% (final estimate) for Q4 2008.
Bureau of Economic Analysis Announcement: Gross Domestic Product, First Quarter, 2009 (Advance) “Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 6.1% in the first quarter of 2009, (that is, from the fourth quarter to the first quarter), according to advance estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP decreased 6.3%.” (Table 1 and Chart 1).
Data extracted from: U.S. Bureau of Economic Analysis
Are things getting better or worse? On a positive note, the BEA release cited an increase in personal consumption expenditures, the largest component of GDP. “The decrease in real GDP in the first quarter primarily reflected negative contributions from exports, private inventory investment, equipment and software, nonresidential structures, and residential fixed investment that were partly offset by a positive contribution from personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, decreased.”
“The slightly smaller decrease in real GDP in the first quarter than in the fourth reflected an upturn in PCE for durable and nondurable goods and a larger decrease in imports that were mostly offset by larger decreases in private inventory investment and in nonresidential structures and a downturn in federal government spending. Real personal consumption expenditures increased 2.2% in the first quarter, in contrast to a decrease of 4.3% in the fourth. Durable goods increased 9.4%, in contrast to a decrease of 22.1%. Nondurable goods increased 1.3 percent, in contrast to a decrease of 9.4%. Services increased 1.5%, the same increase as in the fourth. Real nonresidential fixed investment decreased 37.9%.”
PCE increased in all categories except food (-0.8%), housing (-0.01%), and transportation (-0.14%). The BEA release cited two key products, both improvements from Q4, “Motor vehicle output subtracted 1.36 percentage points from the first-quarter change in real GDP after subtracting 2.01 percentage points from the fourth-quarter change. Final sales of computers added 0.05 percentage point to the first-quarter change in real GDP after subtracting 0.02 percentage point from the fourth-quarter change.”
Figure 1 shows the quarterly changes in real GDP growth from 1990 to the present. The general “pattern” of increases (peaks) and decreases (troughs) of the business cycles. The three troughs with low points below zero are the recessions of 1990-91, 2001, and 2008. Not all troughs reach below the level of zero. Most cycles simply decline as the rate of growth slows, but still reflect (although smaller) positive growth. The negative growth of Q4 2008 and Q1 2009 is the most severe downturn since the early 1980s.
Data extracted from: National Council of Economic Education
Real GDP by Sector, First Quarter 2009
“Real personal consumption expenditures increased 2.2% in the first quarter, in contrast to a decrease of 4.3% in the fourth. Durable goods increased 9.4 percent, in contrast to a decrease of 22.1%. Nondurable goods increased 1.3%, in contrast to a decrease of 9.4%. Services increased 1.5%, the same increase as in the fourth.” Consumers are spending more.
“Real nonresidential fixed investment decreased 37.9% in the first quarter, compared with a decrease of 21.7% in the fourth. Nonresidential structures decreased 44.2 %, compared with a decrease of 9.4 percent. Equipment and software decreased 33.8%, compared with a decrease of 28.1%. Real residential fixed investment decreased 38.0%, compared with a decrease of 22.8%.” Investment by businesses and households (houses) are slowing at an increased rate.
Real exports of goods and services decreased 30.0% in the first quarter, compared with a decrease of 23.6% in the fourth. Real imports of goods and services decreased 34.1%, compared with a decrease of 17.5%.” Both imports and exports decreased, but net exports remained a negative number in the determination of U.S. GDP. Net exports are subtracted from GDP.
“Real federal government consumption expenditures and gross investment decreased 4.0% in the first quarter, in contrast to an increase of 7.0% in the fourth. National defense decreased 6.4%, in contrast to an increase of 3.4%. Nondefense increased 1.3%, compared with an increase of 15.3%. Real state and local government consumption expenditures and gross investment decreased 3.9%, compared with a decrease of 2.0%.” The recent increases in government spending, which had been the only positive component in Q4, reversed in Q1.
Figure 2 shows the value of the sectors of U.S. GDP in Q1 2009 in current (nominal) dollars and in chained dollars (adjusted for inflation). Personal consumption expenditures were, by far, the largest percentage of GDP (almost 70%). Private investment was only 11% of GDP in Q1, but that component decreased over 24% in the last year. The increase of 2.6% of PCE was approximately $379 billion. The 24% decrease in investment was about $370 billion. The increase in consumption was offset by the decrease in investment from Q4 2008 to Q1 2009.
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
First Quarter 2009
(Advanced Estimate in $ billions)
(nominal) Chained Dollars
(adjusted for inflation)
Gross Domestic Product 14,075.5 11,340.9
Personal Consumption Expenditures 9,955.7 8,214.2
Private Investment 1,579.8 1,329.8
Net Exports -337.7 -308.4
Government Expenditures 2,877.7 2,073.8
Percent Change from Q1 2008 (final) to Q1 2009 (advance)
Gross Domestic Product -2.6%
Personal Consumption Expenditures -1.2%
Private Investment -24.2%
Government Expenditures 1.7%
Data adapted from: Business Cycle Dating Committee, National Bureau of Economic Research, report on “Determination of the December 2007 Peak in Economic Activity,” December 11, 2008: http://www.nber.org/cycles/dec2008.html
The Impact of the Recession
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 have worsened. GDP growth (despite the popular belief) is not the sole determinant of a recession. 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.”
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.
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. Reduces 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.
According to the following data about the performance of the U.S. economy since the beginning of the current recession (Figure 3), the data for real GDP growth shows trends of employment and unemployment rate significantly worsened (almost continually) since December 2007. As payroll employment decreased, the unemployment rate increased (with few minor exceptions). As GDP growth slowed and turned negative, the unemployment rate increased and payroll employment decreased. As payroll employment decreased and real GDP decreased, there was little inflation and, at times, short periods of deflation in consumer prices.
Figure 3: U.S. Economic Data
December 2007-March 2009
Real GDP Growth
(Quarterly) Payroll Employment Unemployment Rate (CPI-U) Consumer Price Index (%change)
Dec 2007 -0.2 (Q4) 120,000 4.4% 0.3%
Jan 2008 -72,000 4.9% 0.4%
Feb 2008 -144,000 4.8% 0.2%
Mar 2008 0.9 (Q1) -122,000 5.1% 0.4%
Apr 2008 -160,000 5.0% 0.2%
May 2008 -137,000 5.5% 0.5%
June 2008 2.8 (Q2) -161,000 5.6% 0.9%
July 2008 -128,000 5.8% 0.7%
Aug 2008 -175,000 6.2% 0
Sept 2008 -0.5 (Q3) -321,000 6.2% 0
Oct 2008 -380,000 6.6% -0.8%
Nov 2008 -597,000 6.8% -1.7%
Dec 2008 -6.3 (Q4) -681,000 7.2% -0.8%
Jan 2009 -741,000 7.6% 0.3%
Feb 2009 -651,000 8.1% 0.4%
Mar 2009 -6.1 (Q1) -663,000 8.5% -0.1%
Data adapted from: CPI monthly/annual and Unemployment rate data
As the economy loses jobs and output, people lose income. As incomes decrease, demand decreases. When the decrease in demand results in more job losses, the economy can spiral downward. The April 29 BEA report notes that “Current-dollar personal income decreased $59.9 billion (2.0%) in the first quarter, compared with a decrease of $42.9 billion (1.4%) in the fourth.” Many say that the United States (and may other nations) is just entering a recession that will get worse before it gets better. Others sense that we are near, if not at, the bottom. Personal consumption expenditures did increase in the last quarter.
Although consumer spending may have increased, private investment dropped almost 40% in Q1, 2009. Less investment means fewer jobs are being created – either because companies choose not to hire more employees or because businesses have reduced their purchases of tools, vehicles, technology and other means of production.
Pros and Cons of U.S. economy slowdown
For Americans, a global slowdown, short of a recession, would not be all bad news. Exporters would benefit, though they account for only 12% of the economy. A gradual global slowdown would also give the Fed far more room to maneuver without the threat of stoking inflation.
Social effects: volunteerism bloom
According to Senior (2009), volunteerism is booming in New York. Compared with the first quarter of year 2008, volunteerism has seen a 32 percent increase.
Also, people are initiating public discussions that reevaluate the purpose of work—as if trying to remind us, after a long bender of risk-taking and creative economics, that there’s dignity in secure, generative labor. This June, as the economy was slowing, Drew Gilpin Faust, Harvard’s new president, used her baccalaureate address to discuss the complicated allure of Wall Street. Her closing thoughts contained both an entreaty and admonition: “If you don’t pursue what you think will be most meaningful, you will regret it.” (The Harvard Crimson later reported that 8 percent fewer graduates would be heading into the financial and consulting sectors than the year before.)
A more affordable city, better attitudes toward work and leisure, finer civic morals—these are silver linings for culture and United States’s luckier people, the ones who are still working or have some other means to get through this crisis. But for those facing financial hardship, which is ultimately what recessions are all about, these improvements are minor consolations. We have heard a lot about bankers cast out to sea. But the unemployment rate among unskilled men, particularly African-Americans and Latinos, is disproportionately high. As Mike Wallace points out, a constrained job market often offers the least educated and poorest poor the fewest options. “During the Great Depression,” he notes, “when poor women lost garment-shop jobs, many turned to the street-corner ‘slave markets’ of Brooklyn and the Bronx, renting themselves out for a pittance as domestic laborers, or they resorted to sex trades ranging from taxi dancing to prostitution.”
No one is suggesting things will get that dire this time around. But recessions do not tend to be moments when cities can expand their social safety nets, and this time is no exception: In order to close the budget gap, Bloomberg is proposing reductions across the board—including cuts in child-welfare centers, homelessness programs, and certain immigrant services. The Spanish-language press produces a steady stream of stories about the devastation of small businesses and the sharp decrease in wages sent back home. “In some cases, the flow of money has reversed direction,” says Alberto Vourvoulias, the executive editor of El Diario. “People are asking relatives at home to go into their savings and send money here. Employment has decreased, but costs of living here remain incredibly high.”
“It’s possible we’ll end up with the good parts of the seventies— a rich bohemian culture—and not the bad,” says NYU sociologist Dalton Conley.
Nor is it just the poorest poor who are suffering. This recession may provide a foothold for some middle-class Americans, but it will just as surely squeeze out others. A fair number of families overleveraged themselves at the peak of the boom, assuming they’d have two incomes, and now find themselves in more precarious arrangements; those who did not own homes but are suddenly contending with lost jobs or lower wages are barely scraping by. And for Americans families whose mothers stayed at home by choice, rather than necessity, it is possible this downturn will force them to reconsider the consequences of that decision if their husbands are now unemployed.
Psychological effects of unemployment
Most recent studies on the subject suggest that the psychological effect of unemployment is even greater than the loss of income that accompanies it. Andrew Oswald, an economist at the University of Warwick, has collected happiness data from hundreds of thousands of people both in the United States, and what he’s consistently seen is that people recover more quickly from becoming disabled, even widowed, than from the long-term loss of a job. “People may draw their benefits from the government,” he says, “but they don’t seem to psychologically acclimate.” Everyone tends to have a natural hedonic set-point, a zone within which their internal mood-thermostat tends to hover, just like their weight. Sustained unemployment is one of life’s few upsets that seems to permanently depress it. Even if this recession is shorter than pessimists predict, those who are laid off in this period will still pay a concrete, long-term price. “It’s what economists call ‘scarring,’?” explains Oswald.
But there are downsides too: the U.S. would see high energy prices as Asia’s demand for oil kept soaring, a continued dollar slump as low interest rates made it less attractive to hold dollar-denominated securities, and the threat of rising inflation as a weak dollar made imports more expensive. And a global recession (generally defined as growth of less than 2.5%; since the Depression, global growth hasn’t actually gone backward) would be just plain bad news, depriving companies of the markets at home and abroad.
So the crucial question is whether the country’s policymakers — in particular the Federal Reserve — are capable of steering the economy between the twin risks of a painfully deep recession and yet another bout of unsustainable, debt-fueled consumer spending. There seems to be little controversy over whether the Fed should ease rates, but there’s lots of controversy over when and how much. The Jan. 22 rate cut came as a shock, but it did seem to calm the markets, if not buoy them.
“The debate is not whether we’re going to have a soft landing or a hard landing in the U.S. but how hard the landing is going to be,” says Nouriel Roubini, professor of economics at New York University. He sees a sharp, possible year-long U.S. recession and a global slowdown. Despite Asia’s torrid growth, consumers in China and India accounted for only $1.6 trillion of the world’s spending in 2007, a tiny fraction of the $9.5 trillion spent by Americans, according to Stephen Roach, head of Morgan Stanley’s business in Asia. It is impossible to pull U.S. spending back without sending ripples through the rest of the world.
So what happened now? Among economists, investors and policymakers, there’s little consensus about how long this recession is going to last, or how the U.S. and the world will react to that bitter medicine. What has become evident is that globalization cannot insulate us from recessions. The question is whether an increasingly integrated global economy can help soften the pain we are likely to feel at home – or will make the pain worse.
The lesson here may be that there is no solution to the problems of the U.S. economy that won’t involve some pain. One interesting dynamic that will play out over the next few years is that some people and some countries are in far better shape to weather a slowdown than others. Right now, the U.S. isn’t one of them: with our trade deficits and federal budget deficits, we may be more vulnerable than other economies to the effects of a broad global downturn. And so whatever happens in the markets this year, you probably will not feel as house-proud as you did two years ago. Someone you know will be looking for a new job. And gas won’t be getting much cheaper. The Fed can’t magically make all that go away. Neither can Congress or the White House. The best they can do is keep it from getting any worse than it has to be.
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