Some Reminders from Econ 101:
GDP is an estimate of the total value of all final goods and services produced during a year (or in a quarter expressed at an annual rate).
It's the broadest most comprehensive estimate of the value of the total output (and income) produced in the economy.
Estimate. Yes, it's an estimate and would look much like making sausage, but don't worry about that. It's as good as smart people can make it, but, perhaps more important, it's reasonably consistent over time. The consistency makes it useful in the same way that my bathroom scales are, or the calorie count on my exercise equipment. You can measure relative performance without perfection on the level of performance.
Value. Price is the way we add up diverse elements-the common denominator. A three dollar broom adds half as much to GDP as a $6 hamburger.
(Breakdown of GDP Numbers after the Fold)
Final. If we count hamburger meat, tomatoes, lettuce, etc. and also count the hamburger, we would be double counting. The statisticians try to avoid double counting by counting the final product only-which includes its components. Buying an existing house doesn't count; buying a new house does.
Annual Rate. Using the annual rate facilitates comparisons of different time periods. The first estimate of the 2nd quarter real GDP number (GDP with inflation removed) is a contraction of a 1percent annual rate. It was really a quarter of that multiplied by 4. You can compare the 2nd quarter's 1 percent decline to full years or half years expressed at an annual rate.
Summary of Second Quarter GDP
Real GDP declined at an annual rate of one percent in the second quarter, much improved from a 6.4 percent (revised) rate of decline in the first quarter.
Eight tenths of the one percent decline was attributed to a reduction in inventory investment. That means Real Final Sales (real GDP minus inventory change) declined only two-tenths of one percent. A 0.3 percentage point increase in inventories would have shifted real GDP growth into positive territory. Close but no cigar.
Inventories declined by a larger 2.36 percentage points in the first quarter. Declining inventories generally increase the chances of growth when they need to be rebuilt. Think third quarter.
The major spending components pulling real GDP down are as follows:
Consumption -1.2% (from + 0.6%)
Real non-res. Inv. -8.9% (from -39.2%)
Real Exports -7.0% (from -29.99%)*
Inventory Investment -0.8% (from – 2.36%)
*Smaller negatives have positive impact on change.
Major spending components pushing real GDP up and reducing the net decline.
Fed Govt. Spending +10.9% (from -4.3%)
State & Local Govt. – 2.4% (from -1.5%)
Real Imports -15.1% (from -36.4%)
(All categories not included.)