Advancing a Free Society

Friday GDP arithmetic

Friday, August 27, 2010

We have new GDP numbers from the Department of Commerce’s Bureau of Economic Analysis.

  • U.S. real Gross Domestic Product grew at an annual 1.6% rate in the second quarter of this year.
  • This is the second estimate for Q2 GDP.  The first, released at the end of July, was +2.4%.  This is therefore a downward revision, but we’re still growing, albeit slowly.
  • The economy is growing more slowly than it did in Q1, when it was growing at a 3.7% annual rate.

As a rule of thumb, when the economy is operating near full employment, the U.S. can sustain a long-term real GDP growth rate of between 3 and 3.5 percent.  When we’re operating way below capacity, as we are now, in a strong recovery you would expect and hope that we’d grow much faster than that.  This is not yet a strong recovery.

I want to use this as an opportunity to explain an arithmetic point about GDP growth rates and stimulus.  The conclusion sounds simple but when they see it in the numbers a lot of people get confused:  When stimulus ends, the GDP growth rate goes down.

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