Sources of Growth in the Economy - Real GDP from Q4 2006 to Q3 2010

Sources of Growth in the Economy – Real GDP from Q4 2006 to Q3 2010

November 11, 2010 Disclosures POSTED IN Economy

The Q3 2010 advanced estimate of Real Gross Domestic Product (GDP) was released at the end of October and revealed that the economy grew at an annualized pace of 2.0% during the quarter. GDP measures the amount of goods and services produced within a country, and is often used to gauge the health of an economy. The four major components of GDP include personal consumption expenditures (70.4%), private domestic investment (12.9%), net exports (-3.8%) and government consumption and investment (20.5%). The net export figure is negative because the United States currently imports more goods and services than it exports. “Real” GDP is GDP adjusted for inflation.

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The size of the American economy, based on Real GDP, has yet to reach the peak level observed during the second half of 2007.

Q3 2010 GDP indicated that the United States economy grew at an annualized rate of 2.0%, making it the fifth quarter in a row that total economic output rose. Prior to Q3 2009, the American economy had contracted five of the previous six quarters, from Q1 2008 to Q2 2009.

Taking a closer look at the past quarter personal consumption continued to grow, contributing 1.8% to the total of 2.0% growth in Real GDP. Private domestic investment also added to Real GDP, contributing 1.5% to Real GDP. However, investment has been weaker quarter over quarter for the past two quarters. Businesses have not been quick to expand capacity and the build up of inventories has slowed. The import of foreign goods was a primary reason for the low Q3 2010 Real GDP figure. Net exports, exports minus imports, detracted from GDP at an annual rate of -2.0%, signifying that America imported more goods and services than it exported.

During the peak of the recession from Q3 2008 to Q1 2009 the U.S. economy contracted at annual rates of -4.0%, -6.8%, and -4.9%. The main detractor from GDP was gross private domestic investment. Although this component only makes up around 13% of GDP, investment by businesses plunged causing the economy to contract. During these three quarters, consumers also pulled back further contributing to the decline.

Over the subsequent recovery period from Q3 2009 to Q1 2010 it was private investment along with consumers that caused the economy to expand. Private domestic investment has been the primary driver during the recovery adding more to GDP than any other component. Increasing domestic investment is typical of post recession recoveries.