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The Reality of Recovery
Subject Gross Domestic Product
Topic Productivity and Growth
Key Words Recession, Economic Growth, Unemployment
News Story

By all accounts, the announcement of a 5.8 percent spurt in Gross Domestic Product (GDP) for the first quarter should have ended all worries about the state of the economy. After all, the economy had the shortest recession in the post World-War II era followed by a sizeable increase in GDP. But many economists have not ceased worrying and, according to them, the economy is on shaky ground.

Although the economy's growth rate was 5.8 percent in the first quarter, spending in two sectors, government and business accounted for the major share of growth. Inventory replacement accounted for almost 60 percent of first quarter growth. Without government spending and business replacement of depleted inventories, growth would only have measured 1.3 percent. Three-percent growth is considered necessary to generate a sufficient number of jobs to keep unemployment constant. Also, if growth is less than 3 percent, tax revenues are insufficient to maintain state and local spending. The 3 percent threshold is considered by some to be the minimum rate that provides people with a feeling of prosperity.

The hoped-for quick recovery does not appear to be on the horizon. Unless there is a dramatic increase in consumer spending, the growth rate should decrease because, public spending and inventory restoration are forecast to fall. In fact, economic growth is predicted to be less than 3 percent for the remainder of the year. As if to underline the weakness of the current recovery, unemployment rose to 6.0 percent in April from March's level of 5.7 percent.

The American economy produces more than $10 trillion a year in goods and services. Three-percent growth means that spending has to increase by $300 billion in order to reach the critical threshold. With home building at record levels, not much more can be expected from this sector. Consumer spending, including net exports, accounted for less than 25 percent of economic growth in the first quarter. Given the dollar's strength and the high levels of domestic spending, not much more is expected from these two sectors.


(Updated June 1, 2002)

Questions
1. What are the major components of Gross Domestic Product? What is the relative importance of each component in the GDP?
2. About half of the increase in government spending was for defense. The other half was in state and local expenditures. What percent of government spending is spent on the Defense Department? Do you expect defense expenditures to increase or decrease in the future?
3. The article talks about the importance of inventory replacement to the first quarter GDP figures. How are inventories counted in the GDP? What determines the rate at which firms will choose to replace inventories?
Source Louis Uchitelle "Despite Appearances, Economy is Still Shaky," The New York Times, May 5, 2002.

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