Why You Should Be Happy About 2.2% GDP Growth

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gross domestic productThe federal government is reporting that gross domestic product, or GDP, grew at a 2.2% rate in the first three months of 2012. Following the announcement of the actual number, the next thing you probably heard or read is how disappointed everyone is.

Here's a primer on exactly what the GDP growth rate is, why the world stops when the number is announced, and why 2.2% is nothing to be disappointed about.

The Invention of GDP


Economists "invented" GDP in 1934, and it became the primary tool for measuring the country's economy in 1944. The idea is to try to get to a single, pure number that can be compared against the previous number to calculate the GDP growth rate.

GDP itself is a relatively straightforward calculation: Put simply, it's the total market value -- expressed in dollars -- of all the goods and services produced in the United States. Income and imports from U.S. companies and U.S. citizens not in the country aren't counted. Any effects of domestic inflation are also factored out.

This is the number that's widely reported and debated. GDP is calculated by the Bureau of Economic Analysis, part of the Department of Commerce, and is looked at every three months.



Post-Holiday Blues


So the 2.2% number currently dominating the headlines is the GDP growth rate for the first quarter of 2012. It measures the change in GDP from the last quarter of 2011 to the first quarter of 2012. The number is telling you that the U.S. economy has grown at an annualized 2.2% rate in that period of time.

The general feeling of disappointment in the air is happening because the growth rate has fallen from the last reported growth rate, which was 3.0%. There are several possible reasons for this decline:
  1. The initial quarter of any year can be a little "soft," as economists put it, simply because it's the first quarter after the year-end holiday season, when consumers typically spend the most and, hence, manufacturers and service providers typically produce the most. So even in the best of times, first-quarter GDP growth can be down a bit from the fourth quarter of the year previous.
  2. A second factor has to do with accuracy. The GDP growth number typically gets at least one, if not two, revisions. Even almost one month after the official end of the first quarter (March 31), the GDP number the federal government is using to compare against the last GDP to come up with today's reported growth rate isn't necessarily accurate. Important numbers have yet to come. As such, this 2.2% figure will almost certainly be revised. Last quarter, that revision was upward.
Putting Monday's Number in Context

Even if the number were never revised, 2.2% in and of itself isn't all that bad.

The U.S. saw 4.8% GDP growth in March 2006, but that was in the middle of the housing bubble -- an unsustainable lending and spending spree that led directly to the financial implosion of 2008. The country also saw 5.6% GDP growth in the fourth quarter of 2009, but there was a massive government stimulus program in motion at the time. That has long since run out, along with its stimulating effects.


Put in context, GDP growth in the upper 2% to the 3% range, maybe up to 4%, is the norm for our economy in healthy times anyway. And certainly, compared with what we've experienced since the start of the financial meltdown, 2.2% is quite encouraging. At the height of the crisis, during 2008 and 2009, the economy contracted for four straight quarters, meaning there was GDP shrinkage, not growth. It was the worst recession since the Great Depression of the 1930s.

So America's GDP growth rate is a benchmark, which we use to try to get an overall idea of how our economy is doing. It's the big picture. It helps businesses, governments, and consumers plan. Hence, the number is always big news.

For now, consider that 2.2% growth rate in the context of the past few years, wait to see in which direction it will be revised, and start looking forward to helping out with that fourth-quarter holiday GDP boost we all inevitably provide.
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