Going, Going, Hopefully Gone
Subject GDP
Topic Recession
Key Words Recession, Unemployment, GDP
News Story

The Commerce Department reported its preliminary estimate of Gross Domestic Product (GDP) for the fourth quarter of 2001 and, to the surprise of many, GDP rose 0.2 percent. GDP figures will be revised next month, but if the revised numbers continue to show an increase, the current recession, which began in March, will have ended. Congress and the President are presently considering an economic stimulus package which, according to the GDP data and Federal Reserve Chairman Alan Greenspan, may no longer be needed.

During the third quarter of 2001, GDP fell at a 1.3 percent annual rate as economic activity virtually halted immediately following the attacks. In response to the terrorist attacks, however, government spending, especially at the national level, increased significantly. This increase, along with higher automobile sales, was largely responsible for the rise in GDP. Modest growth in the first, second and fourth quarters countered the decline in the third quarter, so GDP at the end of 2001 was actually slightly higher than in December 2000.

There was other positive news in the Commerce Department report. While total hours worked by production and non-supervisory employees on private payrolls fell 4 percent for the quarter, production declined by only 0.4 percent. Increased productivity is being touted as the reason for the difference in hours worked and production. During past recessions, productivity fell thus, and evidence that productivity continues to climb in this recession is significant.

Adding to the downward pressure on GDP was a considerable decrease in inventories - large enough to reduce GDP growth by 2.23 percent. Inventory reductions are viewed as a harbinger of economic recovery, as production will pick up after inventories are reduced to a point that the manufacturer considers acceptable.

Inflation does not appear to be a problem. The GDP deflator fell 0.3 percent, the first time it has fallen in 50 years.

(Updated March 20, 2002)

1. What percent of GDP is attributable to government purchases? How has this changed over recent years?
2. Unemployment rose substantially after the terrorist attacks. How are unemployment compensation benefits treated in the calculation of GDP?
3. The Federal Reserve decided not to cut interest rates at their last meeting. Why did the Fed avoid a 12th cut in rates?
Source John M. Berry, "Numbers Point to Economic Recovery," The Washington Post, January 31, 2002.

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