2008’s New Economic Highs Deeply Disappoint

Copyright, The New York Times Company

When measured in terms of terms of financial gyrations and national employment, 2008 was an absolutely terrible year. When measured in terms of production, the U.S. economy in 2008 was the best in its history.

This week the Bureau of Economic Analysis will release its first estimate of Gross Domestic Product (G.D.P.) for the fourth quarter of 2008. G.D.P. measures the total amount produced and spent in the nation during a particular time frame, such as a year or a quarter-year. Some say that G.D.P. “is the best barometer of the country’s economic fitness.”

The first column of the table below shows GDP for the four quarters of 2007. 2007 United States G.D.P. was about $3,500 billion dollars for the United States in each quarter, for an annual total of $13,807 billion dollars. To put that more personal terms, the last rows of the table divide by the total population: 2007 G.D.P. was $45,776 per person.

One reason that more dollars can be spent in one year as compared to the previous year is that a dollar is worth less over time, but that by itself does not help American living standards. In order to compare 2008’s results to 2007’s in a way that is informative about living standards, most economists (including those at the B.E.A.) refer to real G.D.P.: dollar G.D.P. adjusted the effect of inflation.

The second column of the table therefore reports real G.D.P. for each quarter of 2008, measured using 2007 prices. That is, production for 2008 is measured using the items actually produced in 2008, but values each item at its 2007 price.

In each of the first three quarters of 2008, more was produced in our economy than was produced in the same quarter a year before. For example, G.D.P. in the third quarter (the months of July, August, and September) of 2008 was $26 billion more than in the same quarter of 2007.

We do not yet know what the B.E.A. will measure for the final quarter of 2008. Pundits such as the economic teams at Goldman Sachs or the Bush White House say that the growth rate of real G.D.P. from the third to fourth quarters will be about -5 percent per year, which means that they expect real G.D.P. for the fourth quarter will be 1.25 percent lower than it was in the third quarter: about $3,465 billion.

My estimates (detailed here) suggest that the B.E.A. will report fourth quarter real G.D.P. to be $3,503 billion – or about the same as in the third quarter. Despite our disagreement about Q4, the pundits and I agree that the annual total for 2008 will be about $14,000 billion, or very close to $46,000 per person. With real production of $46,000 per person, the “recession year” of 2008 produced more goods and services than did 2007, or any other year in U.S. history.

I have not seen any explanation of how the U.S. economy can reach new production highs at the same time that jobs disappear and its financial system is in chaos. But – given that the disease has such strange symptoms – I have to wonder whether the usual remedies are still appropriate.