Friday, October 27, 2006

Slowing GDP Growth

The advanced estimate of third quarter GDP came out this morning from the Bureau of Economics Analysis. (BEA) It wasn’t pretty. In the FOMC statement earlier this week, the Fed projected that “going forward, the economy seems likely to expand at a moderate pace.” I am guessing that this GDP number is a little too moderate for comfort.

Here is the story from the BEA Press Release dated 10/27/06:
Real gross domestic product (GDP), the most comprehensive measure of economic activity, and increased 1.6 percent in the third quarter after increasing 2.6 percent in the second quarter, according to estimates released today by the Bureau of Economic Analysis.

The deceleration in quarterly real GDP growth primarily reflected the following:
-Imports accelerated.
-Inventory investment turned down.
-Residential investment decreased for the fourth consecutive quarter; the decrease was the largest since the first quarter of 1991.
-Consumer spending for services and state and local government spending both decelerated. “

Housing subtracted 1.1 percentage points from third-quarter growth. To Nouriel Roubini the GDP report supports his forecast that a recession is in the offing in early 2007.

More information on GDP is available in Chapter 7 of your text book, highly recommended. It helps when you review a story in the digital media on GDP to remember the most important equation in macroland:

GDP = C + I + G + X – M.

Extra Credit:
Why does the BEA Press Release refer to real GDP? Is there a fake GDP? What's so bad about 1.6% growth? If you are the first student to send me an e-mail ( with the answer, you will be rewarded with two extra credit Discussion Board points. Only two points extra credit per student can be earned in any given week from the blog questions.

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