Wednesday, January 30, 2008

Real GDP Per Capita Shows Contraction, Not Slow Growth

Today we learn the U.S. economy weakened to 0.6% growth in the fourth quarter, a lower than expected growth rate according to CNBC and Bloomberg. What is not being reported, though, is that on a more meaningful per capita basis the U.S. economy outright contracted in the fourth quarter at a -0.4% rate. So as a public service, I am posting the below graph that shows the annualized growth rate of real GDP and real GDP per capita. The data comes from the BEA (I used their quarterly population data from the personal income tables).

To make sense of this decline in real GDP, I point you to the BEA table below which provides a nice decomposition of the real GDP growth rate. Here, each expenditure category's contribution to overall real GDP growth is reported. All the categories contributions sum to the real GDP growth rate.

Unsurprisingly, residential investment (circled in red) has been a drag all year. Another non-surprise given the decline of the dollar, is that net exports (also circled in red) have provided a net boost to real GDP since the second quarter. However, the contribution from net exports declined dramatically in the fourth quarter. Is this development of weakening global aggregate demand? The other interesting development to note in this table is the huge drag inventories had on real GDP in the fourth quarter.

Finally, below is the same table on an annual basis for the years 2004-2007. Here, you can see residential investment began to drag on the U.S. economy in 2006. Also, this table reveals that the boost from net exports appear to have come more from a decline in imports than from significant gains in exports.

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