(Calculated Risk)
In its first estimate for the fourth quarter of 2011, the Bureau of Economic Analysis
reported Friday that gross domestic product clocked in at an annualized level of 2.8 percent, by far the best showing in a very weak year, but below the consensus forecast of 3.0 percent. That puts GDP growth for the entire year at 1.6 percent. At this time last year, analysts, including the Federal Reserve, were predicting growth in 2011 of 4 percent or higher. Growth in 2010 was 3.0 percent.
GDP growth will be revised in two follow-up reports next month and in March. Today's number was substantially less than the fourth quarter of 2009, the best showing since the Great Recession began in December 2007. GDP growth in the third quarter of 2011 was 1.8 percent.
A key number in today's report was final domestic sales—GDP less the change in private inventories—which came in at a very weak 0.8 percent in the fourth quarter. While personal consumption expenditures picked up substantially in the fourth quarter, a good deal of this came out of personal savings, not from increased earnings. That is unsustainable over the long run.
While the GDP trend-line is up, major forecasters have recently dropped their somewhat rosier previous predictions for 2012. The average is now 2.3 percent for the year. Goldman Sachs recently predicted growth for the first quarter of 2012 at a meager 0.5 percent, which would be a match for the 0.4 percent of the first quarter of 2011. The Federal Reserve recently dropped its forecast from 2.7 percent to 2.2 percent for all of 2012. And the most recent 2012 forecast for U.S. GDP by the international Organization for Economic Cooperation and Development was 2 percent, having forecast an expansion of 3.1 percent last May.
Among the reasons for the lowered predictions is the tightening federal budget, the impact of economic problems in Europe, particularly the still burgeoning sovereign debt, which could lead to a default by one of the Eurozone countries, Italy or Spain being possibilities. The other big concern is the slowdown in GDP growth in China, where a bursting of the real estate bubble may be in the offing.
The fact that this month's announcement will mark the 10th quarter of GDP growth since the end of the Great Recession in June 2009 once again shows the need for a more inclusive gauge of economic well-being than the traditional GDP approach.
This is not to say that GDP has no value. It does. Adjustments in the past 15 years have made it a better measure of what it measures. Its biggest problem comes from it doesn’t measure. Especially about our overall well-being. As Robert F. Kennedy said in 1968, GDP "measures everything, in short, except that which makes life worthwhile."
Take pollution. GDP measures as income a manufactured product that creates pollution as a byproduct. It then measures the clean-up as income. It then measures health services to those sickened by the pollution as income.
GDP also leaves out things such as income inequality, the intensity of poverty, economic security, crime costs, the economic value of civic and voluntary work, the economic value of unpaid housework and child care, educational attainment and life expectancy. It’s a measure that assigns zero value to leisure time, to the depletion of mineral and other natural resources, to the benefits of saving, to trade imbalances, to deficits and debt.
Despite prodigious efforts, nobody has come up with an unflawed replacement. There are Canada's Genuine Progress Index, the Human Development Index and the Gini coefficient. But except for the GPI, these measure far less than GDP. The Commission on the Measurement of Economic Performance and Social Progress initiated by French President Nicolas Sarkozy with Nobel economists Joseph Stiglitz and Amartya Sen in charge, put together a comprehensive report in 2009, but they did not come up with a new, more realistic gauge. Some day, perhaps they or somebody else will.