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A Shrinking Product
Subject GDP
Topic Recession
Key Words Recession, Unemployment, GDP
News Story

Gross Domestic Product (GDP) declined in the third quarter of this year at an annual rate of 1.1 percent. The GDP figures, as reported by the Commerce Department, represent the worst quarterly performance in a decade. Third quarter GDP data include the impact of the September 11 tragedy and the economy's subsequent contraction. The data reinforce an earlier conclusion by an academic panel that the economy has been in recession since March of this year.

Preliminary GDP estimates pointed to a milder decline of 0.4 percent. Deeper than expected reduction in business inventories appear to be responsible for the steeper decline. Inventories fell by $9.7 billion more than the Commerce Department's initial estimate.

While the greater than expected decline in GDP underscores the extent of the recession, the reason for the decline offers hope for a recovery. When inventories rise above accepted levels, businesses trim production. As sales from inventories push the accumulated stock towards, and finally below, accepted levels, production generally increases. Rapidly decreasing inventories may mean sooner than expected increases in production.

Many economists believe that the Commerce Department data support their contention that the current recession will be relatively mild. Others point to other indications that the economy has not as yet bottomed out. The National Association of Purchasing Management reported continued low confidence levels among manufacturers. Another sign of continued trouble is the very modest increase in consumer spending. Consumer spending rose 1.1 percent in the third quarter, about half of the increase in the second quarter. Since consumer spending accounts for almost two-thirds of GDP, changes in spending are important indications of coming trends.

(Updated January 15, 2002)

Questions
1. How is GDP calculated? List the principal approaches to this calculation and briefly describe each.
2.

How important is consumer spending, investment and government spending in the expenditure approach to GDP?

3.

What happens to employment, unemployment and income in a recession? What generally happens to business profits?

Source Neil Irwin, "Economy Shrank in Last Quarter," The Washington Post, December 1, 2001.

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