Real Gross Domestic Product (GDP)

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The following perspective is excerpted from a speech given by Federal Reserve Governor Susan Schmidt Bies at the Eller College of Management Distinguished Speaker Series at the University of Arizona in Tucson, on January 18, 2007. In it she looks at recent trends in economic growth figures and the current area of economists’ concern: the popping of the housing market bubble:

“The slowdown in the growth of real GDP since last spring largely reflects a cooling of the housing market: Sales of both new and existing homes dropped sharply after their peak in the summer of 2005, the inventory of unsold homes has soared, and the number of single-family and multifamily housing starts has fallen nearly 30 percent since the beginning of last year. At the same time, homes are appreciating more slowly and in some markets prices are even declining.

“Nonetheless, a variety of factors should help limit any remaining contraction in housing demand. For example, despite the 4-1/4 percentage point increase in short-term interest rates over the past three years, the interest rate on a thirty-year fixed-rate mortgage has increased only about 1/2 percentage point, and borrowing costs continue to be relatively low. The ongoing growth in employment and real incomes and the recent increase in the stock market wealth of households should also support the demand for housing. Indeed, the latest data on home sales and consumer homebuying attitudes suggest that the demand for housing may be stabilizing. While much of the downshift in the housing market appears to have occurred already, some further softening in housing starts may yet lie ahead as the inventory of unsold homes is reduced to appropriate levels.”

http://www.federalreserve.gov/boarddocs/speeches/2007/20070118/default.htm

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The following is excerpted from a speech given by Federal Reserve Vice Chairman Roger W. Ferguson Jr. at the Howard University Economics Forum in Washington DC on March 3, 2006. In it he discusses the macroeconomic factors that have affected recent GDP growth:

“Last year was, in some respects, a difficult one for the American people and the economy. As you recall all too well, the hurricanes in the fall inflicted a terrible human toll, in terms of both the number of lives taken and the dislocation of so many people. On the economic side, the storms destroyed residential and business capital along with critical infrastructure and also disrupted economic activity, particularly in the energy and petrochemicals industries and at ports on the Gulf Coast. These effects also contributed to the sharp increase in energy prices that occurred last year. Both the aftermath of the storms and the influence of the higher energy prices are reflected in the slower growth of real (that is, inflation adjusted) gross domestic product in the fourth quarter of last year.

“Moreover, much of the slowdown in growth last quarter reflected factors that are unlikely to persist…. Indeed, the most recent data suggest that economic activity in 2006 is off to a solid start. Payroll employment expanded briskly in January--the latest month for which figures are available--on top of sizable gains over the preceding two months. Although these increases contain some bounceback from the effects of the hurricanes, they also likely reflect underlying strength in labor demand--an impression that is corroborated by the recent low readings on initial claims for unemployment insurance. In addition, the underlying pace of activity in the industrial sector has been quite robust recently. Real household spending continued to climb in January; although unseasonably warm weather that month left an imprint on the data, the result suggests some underlying strength in this sector. Housing activity has, on balance, been a bit softer recently but still remains at a high level.

“Overall, the fundamentals appear sufficient to support continued economic expansion. Underlying productivity growth remains strong, the financial positions of households and businesses remain conducive to spending, and, if we have no further run-up in oil prices, the drag on activity from higher energy prices should diminish over time. And the outlook for activity abroad is quite favorable. In Japan, the expansion appears to be broadening, and signs suggest that the Japanese financial sector may finally be stabilizing. Prospects in Europe are gradually improving, particularly in Germany, after several years of sluggish growth. Many emerging market economies also are doing well, with exports providing a significant boost to activity in these countries. These developments should provide some ongoing support to the U.S. economy.”

http://www.federalreserve.gov/boarddocs/speeches/2006/20060303/default.htm

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The following is excerpted from an article titled "Is There Evidence of the New Economy in U.S. GDP Data" by Michael Kouparitsas that appeared in the First Quarter, 2005 issue of the Federal Reserve Bank of Chicago's publication Economic Perspectives. In it he investigates the "new economy" hypothesis using real GDP data:

"Economic theory suggests that temporary cyclical fluctuations in real gross domestic product (GDP) adversely affect the economic well-being of households. For example, when the economy experiences a cyclical downturn, companies lay off workers with resulting negative consequences for the workers and their families. Thus, it is not surprising that cyclical fluctuations in GDP receive a lot of attention from policymakers. Indeed, there is considerable empirical research that shows that cyclical fluctuations in GDP play an important role in the practical conduct of U.S. monetary policy. In general, the U.S. Federal Reserve (Fed) tightens monetary policy (increases interest rates) when the cyclical component of GDP rises and loosens monetary policy (reduces rates) when the cyclical component of GDP falls.

"The debate over the true value of the trend growth rate received a lot of attention in the late 1990s from economic analysts and policymakers. Analysts argued, based on strong observed growth of labor productivity (GDP per worker), that the trend growth rate of GDP had increased significantly. If an increase in the trend growth rate had occurred, this type of structural change would have meant that economists could no longer rely on their longstanding rules of thumb about the relationship between observed GDP and the unobserved cyclical component in formulating policy. This led to speculation by the analysts that the U.S. was a new economy in the late 1990s, in which all the old rules about actual, trend, and cyclical fluctuations of GDP no longer held true. In this article, I test whether there was in fact significant change in the trend growth rate of U.S. GDP over the new economy era. I do so by applying both long-established and newer techniques of extracting the trend component of U.S. GDP data and then testing to see if the implied trend growth rate of U.S. GDP (that is, its average slope) over the new economy era is significantly higher than the implied trend growth rate of U.S. GDP over the preceding productivity slowdown era. Irrespective of the method used to extract the trend component, I find that the implied annual trend growth rate of U.S. GDP was about 3 percent over the productivity slowdown period, which is considerably higher than the typical 2.5 percent estimate based on productivity data, and about 3.25 percent over the new economy era. Although I find a positive difference between the new economy and productivity slowdown era estimates, it is not statistically significant. I conclude that, at least in terms of GDP data, the U.S. was the same old economy in the late 1990s."

http://www.chicagofed.org/publications/economicperspectives/ep_1qtr2005_part2_kouparitsas.pdf

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The following perspective describes how structural changes in the economy, namely weakness in the manufacturing sector, have affected GDP. It is excerpted from the August 2004 issue of The Survey Of Current Business, a publication of the Federal Reserve Bank Of New York. The article is titled "The Relationship Between Manufacturing Production and Goods Output" and was written by Charles Steindel:

"A curious phenomenon of the 2001 recession was the sharp divergence between two arguably similar economic indicators: the manufacturing component of industrial production and the goods output component of GDP. Adding to the peculiarity is the fact that the indicators' movements were much more alike in the previous recession, 1990-91. Beginning in mid-2000, manufacturing, or "factory," production experienced significant declines. The measure, which accounts for about 80 percent of industrial production, fell roughly 6 3/4 percent from June 2000 through December 2001. In the year and a half that followed, production grew very little. Although a more pronounced revival began to take hold in mid-2003, by spring 2004 factory production still fell short of its 2000 peak. The GDP data tell a different story. The 2001 downturn witnessed virtually no drop in overall GDP, and there has been substantial growth since then. Yet GDP encompasses more than just manufacturing activity, so it may not necessarily move in step with manufacturing production. Within the GDP data, however, is a series-goods output-that measures U.S. production of goods. The name suggests that the series, which accounts for about 40 percent of GDP, measures the same type of activity as manufacturing production does. Yet this series, like overall GDP, has behaved quite differently than the factory output numbers in recent years, undergoing only a mild decline in the 2001 recession and displaying sustained growth afterward.

...We find that the recent divergence in the paths of the two indicators is, to a significant degree, in keeping with the long-run tendency of goods output to grow more strongly than manufacturing production. In addition, while the two indicators' contrary movements during the most recent recession and recovery differ sharply from their more uniform movements during the business cycle of the early 1990s, they conform in important respects to their movements in the cycles of the mid-1970s and early 1980s. Having rejected the possibility of indicator error, we argue that the divergence between goods output and manufacturing production in the 2001 recession and subsequent recovery stems largely from two interrelated trends: the strength of spending on consumer goods relative to spending on capital goods, and the growing importance of merchandising services in the sale of consumer goods. Since the output of service sector workers who bring consumer goods to market is counted in goods output but not in manufacturing production, these trends very likely helped buoy the goods output figure during the recession and beyond."

http://www.ny.frb.org/research/current_issues/ci10-9/ci10-9.html