Gross Domestic Product, or GDP, is the value of all final goods or services produced in an economy in a given year. It is split into four different components: consumption, investment, government spending, and net exports. Consumption is 66% of GDP, and is divided into three separate parts: durable goods, nondurable goods, and services. Investment is 17% of GDP, and is divided into four separate parts: residential construction, nonresidential construction, purchase of capital equipment, and changes in inventories.
Government spending is also 17% of GDP, and is divided into three separate parts: state spending, local spending, and federal spending. Net exports is around 1% of GDP, and is calculated by subtracting imports from exports. Consumption The consumption component makes up approximately 66% of GDP. Consumption as a whole is measured by consumer spending, which, according to the Commerce Department, rose in February by 0. 2% following a 1% increase in January. Real personal spending and personal income, however, both declined 0. 2% in February. Personal savings fell $27. billion in February, and the personal savings rate declined to 4. 2% from 4. 4% in January. That makes sense, because if consumers are spending more they are saving less. Also, consumer confidence fell to 56. 3 in February from 61. 2 in January, its lowest final reading since 55. 3 in November. A survey from the Reuters/University of Michigan Surveys of Consumers said that this occurred because of “expectations that the recession would grind on throughout this year and the jobless will keep rising. ” The 12 month economic outlook index also fell to 31 in February from 47 in January; this is its lowest since 1980.
Looking at these numbers, it is clear that the consumer does feel that the economy will be getting better any time soon. Consumption is divided into three separate parts. The first of these is durable goods, which is affected the most during a recession. Durable goods are goods that last for more than three years, such as automobiles. New orders for durable goods dropped 7. 3% in January, but rose 3. 4% in February. According to the Commerce Department, this is the biggest increase since December 2007 and the first rise in seven months. Also, excluding transportation, new orders rose 3. % in February, which is the largest gain since August 2005. According to J. D. Power and Associates, auto sales in the first two weeks of March were down 40% compared to this time last year, and February sales were down 41% compared to this time last year. The automobile industry is expecting to see large losses in this quarter. The second part of consumption is nondurable goods. Nondurable goods are goods that last for no more than three years, such as food and clothing. Orders for nondurable goods rose 0. 3% in February, after an increase of 0. 4% in January. Clothing prices rose 1. % in February, while food prices were down 0. 1% in February. Also, according to Bloomberg, sales at United States wholesalers fell 2. 9% in January, which is the lowest level in more than three years; however, nondurable goods sales at wholesalers actually were up, with drugs, groceries, alcohol, farm products, and apparel leading the way. Nondurable goods are excelling in this economy, because these are necessary goods. The third part of consumption is services. Services are very important in the economy of the United States, because the economy is a service economy.
According to the Institute for Supply Management, the non-manufacturing index dropped to 40. 8 in March, down from 41. 6 in February. It was the sixth consecutive month of decline for the non-manufacturing index. Employment in the service sector also fell in March, to 32. 3 from 37. 3 in February. The Institute for Supply Management has stated that any number below 50 denotes contraction in the sector. In the article entitled “US Service Sector Retreats Again in March” on CNNMoney. com, it was stated that “the service sector represents about 80% of the US economic activity, including banks, airlines, hotels, and restaurants. One can learn quite a bit about the economy of the United States by simply following the service sector, and six consecutive declining months does not help consumer confidence. Investment The investment component makes up approximately 17% of GDP. The manufacturing sector is located in the investment component of GDP and is considered a key indicator in evaluating the strength of the economy. According to the Institute for Supply Management, the manufacturing index rose in February to 35. 8, up from 35. 6 in January. It was the index’s first increase in eleven months, and was predicted to fall to 33. . Sam Bullard, an economist at Wachovia, stated that “Everyone is so pessimistic from first-quarter reports, so even when we see a modest gain, it’s a glimmer of hope. ” All of the eighteen manufacturing industries reported contraction in February however; the Institute for Supply Management, as mentioned previously, stated that any number below 50 denotes contraction in the sector. Bullard, as well as other economists, believe that the index will remain constant until the end of 2009 when it will begin to rise. People feel the same way about this as they do about consumption.
Investment is divided into four parts. The first of these parts is residential construction. Residential construction includes new housing for consumers. CNNMoney. com’s article entitled “Economy: Worst in 26 Years,” investment in housing fell 23% at the end of 2008, making it three straight years of decline. The US Census Bureau reported that the sales of newly constructed houses rose 4. 7% in February from its all time low in January; it was the first increase since July, but it is still down 41% from this time last year.
It was also reported that the median sales price of new houses sold in February was down 18% from February 2008, which is the biggest year-to-year decline in history. An intriguing statistic comes from the Mortgage Bankers Association, which stated that the number of Americans applying for home loans has increased 30%. The Commerce Department reported that initial construction of US houses increased in February, up 22% from January, its first increase since July; however housing starts are still down more than 47% from February 2008.
Housing numbers are starting to look better, and economists believe that the industry has finally bottomed out. The second part of investment is nonresidential construction. Nonresidential construction includes business and commercial construction. According to the Commerce Department, US construction spending fell 3. 3% in January to $986. 2 billion, the lowest it has been since June 2004. It fell 2. 4% in December 2008, and experts were expecting only a 1. 5% decline in January. Compared to January 2008, construction spending is down 9. %. Also, nonresidential private sector spending fell 4. 3% in January, after a 2. 4% decline in December. According to the CNNMoney. com article entitled “Construction Spending at Four-Year Low,” nonresidential construction spending is being “dragged down” by the residential fall. The third part of investment is the purchase of capital equipment. Investment in equipment and software declined at a rate of 28% in the fourth quarter of 2008. Defense new capital goods increased 35. 3% in February according to the US
Census Bureau , and orders for nondefense capital goods increased 7. 1% in February after a 12. 3% decline in January. An increase in nondefense capital goods is significant because it is seen as a measure of business confidence. Also, the Commerce Department reported that new factory orders rose 1. 8% in February, following a 3. 5% decline in January; this increase breaks a six month streak of decline. This is very good sign for the confidence from the businesses in the United States. The fourth part of investment is the change in inventories.
A decrease in inventories, while it decreases GDP, is actually beneficial to an economy in a recession, because it means that all of the goods made in the current year were sold as well as excess from the previous year that was not sold. According to the Commerce Department, US wholesale inventories dropped 0. 7% in January, following a 1. 5% decrease in December. There were record drops in the automobile industry (4. 8%) and in the furniture industry (3. 5%). Wholesale inventories have declined for five consecutive months. Also, the US Census Bureau reported that inventories of manufactured durable goods decreased 0. % in February, following a 1. 1% decrease in January. These numbers hurt GDP, but are very beneficial to the economy. Government Spending The government spending component makes up approximately 17% of GDP. Both the House of Representatives and the Senate recently passed federal budgets for the 2010 fiscal year. The House of Representatives passed a $3. 55 trillion budget, while the Senate passed a $3. 53 trillion budget. Tax cuts for the middle class were extended beyond those in the Obama Stimulus Plan, but it was not determined how those cuts would be financed after 2010. The House plan has a deficit of $1. trillion in the next fiscal year, and cuts the deficit in half by 2013. The proposed Republican plan called for “$3. 6 trillion less in borrowing over the next ten years. ” Many people are worried that the United States government will be spending and borrowing money that the United States does not have. Only time will tell, but I think that the Republican plan would have been more beneficial to the economy at the current moment. Net Exports The net exports component makes up approximately 1% of GDP. It is calculated by subtracting exports from imports. The last time that net exports was positive in the United States was in 1975.
According to the CNNMoney. com article entitled “Economy: Worst in 26 Years,” exports fell at a 24% rate in the fourth quarter of 2008. Also, the World Trade Organization is reporting that trade volumes will fall 9% in 2009, which would be the “strongest contraction since World War Two. ” World trade in 2008 had a slow growth of 2%, following a 6% rise in 2007. The International Monetary Fund is forecasting a 2. 8% decrease. While a slowdown in the world’s trade markets may look like it hurts the economy, since net exports is such a small percentage of overall GDP it has such a small impact. Estimation for 2009
Consumption is off to a very poor start in 2009, as durable goods and services are declining. Durable goods are hurt the most during a recession, but the economy of the United States is a service economy. Decreases in the service sector do not pose well for GDP in 2009. Investment is off to a good start in 2009 though. Residential construction, capital goods, and inventories are all looking good. Government spending is highlighted by the new budget for the 2010 fiscal year. Economists are worried that the United States government will not be able to finance the plan after a few years, which does not pose well for GDP.
For exports, world trade is slowing down, which is hurting every major country. Since net exports is such a small percentage of total GDP, a decline in world trade will not significantly change GDP. With everything that is going wrong in the economy, it is surprising that economists are hopeful for the near future. Although unemployment has increased to 8. 5%, many feel that job losses are at the summit, and as shown previously, residential housing construction spending has increased. Mark Zandi, a chief economist for Moody’s Economy. om, has stated that a slowing of job losses will increase confidence, as will a recent gain in stocks, and these factors will help increase the consumer confidence (which is very low). Joseph Carson, chief economist at AllianceBernstein, stated that retail sales have been stronger than expected, and since that happened before the Obama Stimulus Plan, the Stimulus Plan should bring out stronger growth. Recent housing spending is very reassuring for the economy, as are the stock market increases of late.
Since unemployment is a lagging indicator, it can be expected to continue to rise until the fourth quarter of 2009 before it finally hits the peak. GDP should bottom out in the third quarter of 2009 as consumer confidence builds. As consumers spend more, production and output will increase which will create more job openings. The economy should begin its slow ascent by the fourth quarter of 2009 or the first quarter of 2010. Bibliography “Congress Passes $3. 5 Trillion Budget Outline,” CNNMoney. 3 April 2009, http://money. cnn. com/2009/04/02/news/economy/congress_budget/index. htm? postversion=2 009040304. Construction Spending at Four-Year Low,” CNNMoney. com. 2 March 2009, http://money. cnn. com/2009/03/02/news/economy/construction_spending. reut/index. htm? postversion=2009030210. “Consumer Confidence Hits 3 Month Low,” CNN Money. 27 February 2009, http://money. cnn. com/2009/02/27/news/economy/consumer_confidence. reut/index. htm? postversion=2009022710. “Durable Goods Jump 3. 4%,” CNN Money. 25 March 2009, money. cnn. com/2009/03/25/news/economy/durable_goods. reut/index. htm. “Factory Orders Rise for First Time in 6 Months,” CNNMoney. 2 April 2009, http://money. cnn. com/2009/04/02/news/economy/factory_orders. eut/index. htm? postversion=2009040210. “Global Trade to Fall 9% in 2009,” CNNMoney. 23 March 2009, http://money. cnn. com/2009/03/23/news/international/trade_volumes. reut/index. htm. “Inventories Slide for Five Months in a Row,” CNNMoney. 10 March 2009, http://money. cnn. com/2009/03/10/news/economy/inventories. reut/index. htm. Isidore, Chris. “Economy: Worst in 26 Years,” CNNMoney. 26 March 2009, http://money. cnn. com/2009/03/26/news/economy/gdp/index. htm. Isidore, Chris. “Price Increases Pick Up Speed,” CNN Money. 18 March 2009, http://money. cnn. com/2009/03/18/news/economy/cpi/index. htm.