GDP (Real Gross Domestic Product) – Easy Trends (Second Estimate Q1 2013)
GDP (or Real Gross Domestic Product) is the accepted measure of overall economic activity, so we should care which way it’s trending. I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for real GDP and discuss whether it is currently going up, down or neither. You can read the basics of my methodology on the FAQ page.
NOTE: You may be reading an outdated analysis. Please visit my latest GDP trends analysis for more info.
Quick ‘n Easy
Real GDP is simply the broadest and most widely accepted measure of economic activity. Even though there are specific details of it that many dispute, you can typically be assured that if this number is increasing consistently, things are going well in the economy.
You can read my Easy Intro to GDP for more information on what the Gross Domestic Product represents. Suffice it to say, it’s a broad measure of economic activity. If this number is growing, it is generally a good sign. We probably want to see levels up in the 3 to 3.5 percent annual growth range for signs of an economy that’s growing at a healthy pace. When the unemployment rate is too high, however, you need to have even more growth than that to put a dent in the unemployment figure.
Here’s a historical chart of real GDP annualized growth rate for each quarter from Doug Short, including lines that show the historical average growth rate and the “best fit” line:
GDP Trends and Projections
Below, I will discuss whether real GDP (real gross domestic product) is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released.
GDP Trend Analysis
Quick ‘n Easy
From the 1st quarter of 2009 to the 1st quarter of 2013, there was a confirmed rising trend, with real GDP growing by about $68.1 billion per quarter, which translates to about 2.00 percent growth per year. This is not a cure to our economic health problems. If this continues, the jobs situation won’t improve as rapidly as desired.
Current Trend: Q1 2009 – Q1 2013 – During that time, there was a confirmed upward trend with real GDP rising by about $68.1 billion per quarter (using the value of the dollar from 2005, so we can compare “apples to apples”). That translates to an approximately 2.00 percent annual growth rate, which is not fast enough, given the deep recession from which we’re recovering. Having this growth rate is better than being in recession of course, but the employment situation won’t improve very rapidly at this rate.
Previous Confirmed Trend: Q2 2008 – Q1 2009 – During that time, real GDP was falling by about $209.1 billion per quarter, which translates to a minus (-) 6.20 percent annual growth rate based on the last GDP in that trend. The incredible speed at which the economy was shrinking after the financial crisis really comes into perspective when you see numbers like this.
Projected Next Data Point
While there are multiple releases for each quarter’s GDP, for the projection I will always look to the next quarter, not just the next report. The next quarter’s GDP will be for Q2 2013. If the recent trend (excluding off trend data points) extends perfectly, the actual Q2 2013 GDP will be $13,826 billion (or $13.826 trillion), which would represent an annualized increase of 2.33 percent from the previous quarter. This seems unlikely given that the payroll tax recently went up for people and that the government cut billions of dollars in spending (the “sequester”).
The second estimate for Q1 2013 came in barely below economists’ expectations – an annualized growth rate of about 2.4 percent (versus expectation of positive (+) 2.5 percent). The second estimate was about 0.1 percent worse than the first estimate. This level of growth is still significantly better than the previous quarter’s anemic 0.4 percent rate of growth. From the graph above, you can see that the latest data point sits very close to the trend line for the current trend that began in the 1st quarter of 2009.
This second (second of three) estimate for 2013 Q1 GDP yielded a value that was 1.78 percent higher than the value one year earlier. An analysis once showed that, if this particular comparison yields a number below 2 percent, it has been associated with an impending recession, so this would normally be a troubling sign. But the consensus of recession indicators is not sounding any alarm bells yet.
From most reliable sources I am reading, it is not likely we will enter a recession anytime before mid-to-late 2014, but the months after that are less certain.