U.S. economy – The disappearance of growth

“I’m here to tell you … the U.S. economy is in a recession,” said Sherry Cooper, chief economist for BMO Financial Group, speaking to the Canadian Club of Ottawa January 22.[1] Yet it is only November 29 that the Associated Press reported that the U.S. economy “barreled ahead in the summer, growing at a 4.9 percent annual rate.”[2] How does an economy go from barreling in one quarter, to slump in the next?

The 4.9 percent figure comes from the Bureau of Economic Analysis (BEA), who offers a table which offers simple percentages of annual growth rates in GDP by quarter.[3] But different and very interesting results can be arrived at if we do our own calculations, using the most comprehensible table for GDP (that measured in the dollar value of Gross Domestic Product) and the most meaningful table for measuring inflation (the one that measures consumer prices in major cities).

With these tables, growth before inflation actually looks stronger, coming in at an annual rate of 5.3 percent.[4] But the annual rate for inflation in the third quarter was 2.76 percent[5], leaving real GDP growth at 2.5%, about half of the figure reported by the BEA.

But there is a final figure that has to be taken into effect. Economic statistics are only meaningful when they also take into consideration population growth. Think of it this way – if a country’s economy doesn’t grow at all, but its population does – then as far as the people in that country are concerned, the economy has effectively become smaller. The population of the U.S. is growing at an annual rate of 0.96 percent[6], so the most accurate reading of U.S. growth for the third quarter is 1.59%. (These are all annual figures, reflecting the rate of growth from the third quarter of 2006 to the third quarter of 2007).

That is a much slower rate than first reported, and perilously close to stagnation. We don’t yet have figures for fourth quarter growth in 2007. But we do have inflation figures. It won’t be a surprise to anyone that inflation – the cost of living – has jumped considerably – from 2.76 percent to 4.08 percent.

In all probability, fourth quarter figures will show “negative growth” for the U.S. economy. Two quarters of negative growth, and it will be official – the economy will be in recession.

© 2008 Paul Kellogg


[1] “Canada Will Skirt Recession, But U.S. Already There, Says BMO’s Cooper,” Canadian Economic Press, January 22, 2008, www. economicnews.ca
[2] The Associated Press, “Economy Surged in Summer,” The New York Times, November 29, 2007, www.nytimes.com
[3] Bureau of Economic Analysis, “National Economic Accounts: Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product” www.bea.gov
[4] Bureau of Economic Analysis, “National Economic Accounts: Table 1.1.5; Gross Domestic Product” www.bea.gov
[5] Bureau of Labor Statistics, “Consumer Price Index – All Urban Consumers,” Series ID: CUUR0000SA0, www.bls.gov .
[6] Population Division, U.S. Census Bureau, “Table 1: Annual Estimates of the Population of the United States”; Population Estimates Program, Population Division, U.S. Census Bureau, “Historical National Population Estimates: July 1, 1900 to July 1, 1999,” www.census.gov