Wednesday, March 4, 2009

What Does 6.2 Percent Mean?

On Friday, the Bureau of Economic Analysis reported that gross domestic product fell at an annualized rate of 6.2 percent from the third to the fourth quarter of 2008. This was bad news, but some journalists have exaggerated the finding merely by misreading the report.

G.D.P. measures the total amount produced and spent in the nation during a particular time frame, like a year or a quarter of a year. Some say that G.D.P. “is the best barometer of the country’s economic fitness.”

The solid line on the chart below shows real G.D.P. for each of the four quarters of 2008. Adjusted for inflation, G.D.P. reached its peak of $3,513 billion in the second quarter (April-June). It was slightly lower in the third quarter ($3,508 billion). In the fourth quarter, it fell to $3,452 billion.

Thus, real G.D.P. in the fourth quarter was 1.6 percent less than it was in the third quarter. Why then is the headline “-6.2 percent”?

A quarter is a short period of time, and many readers are used to seeing changes expressed in percent per year. So the B.E.A. reports a negative 6.2 percent annualized, which means that real G.D.P. would be 6.2 percent lower if the quarter’s growth rate repeated itself three more times.

The chart’s dashed line illustrated the calculation. It assumes that G.D.P. will be 1.6 percent lower in the first quarter of 2009, another 1.6 percent lower than that in the second quarter of 2009, and yet another 1.6 percent lower in the third quarter of 2009. The accumulation of those changes is the negative 6.2 percent reported by the B.E.A.

This calculation is frequently misunderstood to mean that in the fourth quarter of 2008, G.D.P. was a full 6.2 percent lower than in the third quarter. For example, initially reported on Friday that G.D.P. shrank 6.2 percent in the quarter (the language seems to have been corrected for the print version), and an Associated Press report that appeared Monday also reported “an alarming economic contraction of 6.2 percent in the fourth quarter.”

A 1.6 percent drop is bad enough — let’s not quadruple it.

1 comment:

hutch said...

i saw a similar headline on bloomberg and the financial times (for another country, but the headline was still wrong).