Trends in the Components in Real GDP
The third quarter's GDP report did not make for uplifting reading, so now is a good time to take a longer run view to help us reestablish our equilibrium, if not the economy's. We are used to focusing on the growth rate of real GDP, along with the contributions of various components to it, but it is easy to lose sight of the magnitudes involved - of the absolute magnitude of real GDP or the relative magnitudes of the components. As we move through the current financial crisis, taking a longer-run perspective and seeing how the economy has evolved, may be, if not comforting, at least informative.
Real GDP has grown from an annual rate of $1.6 trillion in the first quarter of 1947 to $11.7 trillion in the third quarter of 2008 (all figures in 2000 dollars), an average of 3.3 percent per year. While all economic downturns are painful for those directly affected - indeed, some people suffer even in boom times - it has been some time since the U.S economy has endured a severe recession. The 2000 recession lasted about four quarters, but GDP fell less than 0.2 percent. The 1990-1991 recession was shorter, lasting only three quarters, while output fell 1.3 percent. Contrast these two most recent recessions with the three before them: The 1974-1975 recession lasted six quarters, and output fell 3.1 percent. Two official recessions fell back to back between 1980 and 1982. During this period, only three quarters out of 36 were not recessionary, and GDP grew only 0.6 percent over the three years from the first quarter of 1980 to the fourth quarter of 1982. No matter how the NBER dating committee ultimately looks at the current period, it is likely that the U.S. economy has survived worse.
To get a clue as to where the economy may be headed, it is instructive to examine how we got where we are today by looking at the components of GDP. As all first-year economics students learn, GDP represents the amount of goods and services produced by the economy in a given year and is calculated as the sum of the final demand for goods and services by households, firms, and government, along with net exports of goods and services from other countries. (The government component includes only the government's final demand for goods and services; thus transfer payments are not included.) As is often mentioned, consumption is the largest component, currently running at an annual rate of $8.3 trillion, followed by the government component at $2.1 trillion and investment at $1.7 trillion. Exported goods and services totaled $1.6 trillion, with imported goods and services coming to $1.9 trillion, for a net contribution of $350 billion.
Looking more closely at the composition of consumption, we see that consumers spend the most on services ($4.7 trillion), followed by nondurables ($2.4 trillion) and then durables ($1.2 trillion).
Their respective shares of GDP are 40 percent for services, 20 percent for nondurables, and 10 percent for durables. Over the past 20 years, the shares of services and nondurables have been remarkably constant. The share of durables, meanwhile, has risen from 6.5 percent to 10 percent of GDP.
The components of investment have shown much more variation. While the current decline in residential investment is justifiably making headlines now, in 2001 it was nonresidential investment that plunged, as it typically does in a recession.
In the third quarter of 2000, nonresidential investment's share of real GDP peaked at 12.7 percent before falling to 10.2 percent in the first quarter of 2003. For most of this period, residential investment averaged around 4.5 percent of GDP, but during the housing boom it peaked at 5.4 percent in the third quarter of 2005. It now stands at 3 percent and is still trending downward.
Most of government's purchases of goods and services happens at the state and local level ($1.3 trillion). While state and local spending grew steadily from 1988 to 2002, its growth rate since has been nearly flat. Federal defense spending accounts for $551 billion, compared to only $259 billion on federal nondefense spending.
Defense spending's share of GDP fell from 7.3 percent in 1988 to 3.8 percent in 2001. Over the next seven years it rebounded to 4.7 percent. In contrast, the GDP shares of nondefense and state and local spending have been more stable. Nondefense spending averaged just over 2 percent during this period. State and local government spending averaged about 12 percent prior to 2002 and has fallen to about 11 percent currently.
Although net exports contributed only $350 billion to an $11.7 trillion economy, the netting masks a great deal of economic activity. Both imports and exports have grown rapidly. Exports and imports of goods have each grown 6.7 percent since 1988. Exports of services have grown more slowly (5.6 percent), but more rapidly than imports of services (4.2 percent).
Since 1988, the GDP shares of goods exported and imported more than doubled. Predictably, the shares of services exported and imported grew less rapidly. The GDP share of exported services rose only 72 percent, but this easily outpaced the 32 percent growth of the GDP share of imported services.
Increased exports and reduced imports were one of the few bright spots in the most recent GDP report. With weaker U.S. aggregate demand, import growth should continue its decline, at least as a share of GDP. Unfortunately, weak foreign aggregate demand may slow U.S. exports. Given the prospect of weak aggregate demand from consumers and firms in the near term, government purchases of final goods and services are likely to rise and stimulate aggregate demand - he result of both intentional actions (for example, through a boost to infrastructure spending) as well as through the "automatic stabilizers" of deficit spending, unemployment insurance, welfare, and other forms of income support.