The economy grew at a 1.1 percent annual rate during the three months that ended in June. This was less than the 2.4 percent predicted by some private forecasters.
For the three months ended in March, the economy grew at a 5 percent annual rate. That was revised down from 6.1 percent, a figure announced June 27 that was an upward revision from the initial estimate of 5.5 percent in late April.
Wait, there’s more. Recent gross domestic product tabulations indicated the economy grew considerably slower, 2.7 percent per year rather than 3.1 percent, over the four years from 1998 through 2001. And in 2001, actual growth was only 0.3 percent, one-fourth of the rate announced earlier.
It actually decreased in all three quarters from January through September 2001 rather than just the July-September period as had been announced earlier.
There, is that all clear?
Last week’s news makes it easy to see why a lot of people throw up their hands in dismay when the U.S. Department of Commerce makes periodic announcements about how much the nation’s economy is producing.
The term GDP itself is confusing, the phrase “growing at an annual rate” is not clear, and the repeated revisions to numbers previously announced creates even more doubt as to whether the numbers mean anything.
However, given how nervous financial markets have reacted to any news recently, it is good for the average citizen to have some understanding of what is — and is not — implied by news regarding this key economic indicator.
Let’s start with the basics. Gross domestic product or GDP is a measure of output or how much the economy is producing. It measures such output of goods and services in money terms, not physical quantities. And it attempts to avoid double counting by measuring only the value of “final goods,” not raw materials or semi-finished articles.
It is the broadest measure of economic activity and is important because output determines standards of living. When GDP rises, income for the nation’s households as a whole rises. When it falls, total income falls.
The output measured includes both goods — food, clothing, houses, and services — health care, education and recreation. These are valued at their market prices when produced, whether they are sold or not.
But it includes only goods in the final form in which they will be used. So it counts the hamburger sandwich placed on the consumer’s tray, but not also the bun and the meat patty or the wheat flour and the side of beef or the raw wheat grains and the live steer that were the ultimate source of the components in the meal.
Tabulating the output of millions of different goods and services by millions of businesses ranging in size from Fortune 500 behemoths to one-person barbershops is a hugely complicated task. It is much more difficult than the consumer price and unemployment information assembled over at the Bureau of Labor Statistics in the Department of Labor.
Tabulating those two indicators involves fairly straightforward statistical surveys. Unemployment information comes from an ongoing Current Population Survey of 50,000 households every month. The Consumer Price Index is based on a survey of prices of thousands of items that households buy. These two programs take a lot of work and careful attention to detail, but they pale in comparison to trying to add up total production.
GDP tabulates information from a number of sources including surveys, production information released by manufacturers, and shipments through ports. Some of this information is available quite quickly, but much only after a long delay.
Hence, the department’s division into “advance,” “preliminary” and “final” estimates of GDP and the plethora of subsequent revisions.
Information has value to businesses and policy makers and often the earlier it is available, the better. At the same time, inaccurate information can be misleading and cause bad policy and management decisions. Commerce releases its “advance” estimates based on partial information, knowing or hoping that users will take such info with a grain of salt. Then it follows up with more refined numbers as greater data becomes available.
The July 31 announcement for the second quarter of 2002 was just such an advance announcement. The announced decrease for the first quarter was a final estimate correcting the preliminary estimate announced in late June, which in turn had amended the advance announcement, made in late April.
The key lesson here is that one swallow does not make a summer and one GDP announcement does not constitute history. Everyone should regard GDP data as useful estimates of what is going on, but not precise descriptions of detailed reality.
What is the gist of these most recent announcements? Recently, the economy is growing slower than many thought. The 2001 recession lasted a little longer than we thought, and growth in productivity and growth in the preceding 5 years were not quite as high as previously estimated.
That may be useful to know, but it does not affect most households or businesses in any meaningful way. The situation of families and firms still depends on their specific financial circumstances, as should decisions about the prudence of any purchases or investments that they contemplate. Gross domestic product is a useful economic indicator, but we should not make it into more than it is.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.