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In a previous article, U.S. Output in 2009, I wrote that in terms of output as measured by Real Gross Domestic Product (GDP) the U.S. economy did poorly in 2009. Even though the population grew by 0.9% in 2009, Real GDP shrank by -2.43%.

But the headlines on the papers read:

U.S. GDP Grows Faster Than Expected In Q4 2009
GDP Up 5.7% in Q4 2009

So if the economy contracted in 2009, why did everyone cheer at the advance release of the 4th Quarter 2009 GDP.

Rate of Output
GDP is reported quarterly, but at an annual rate. Here is an analogy.

Suppose you are driving down the 405 freeway in LA. You are going to drive for one hour. Suppose during the first 15 minutes you hit some light traffic but manage a steady 45 miles per hour. During the second quarter hour you hit some traffic going over the Sepulveda pass and slow down to 30 MPH. Then during the third quarter hour the traffic eases and you average 45 MPH. Finally, during the fourth quarter hour, it really opens up and you average 60 MPH.

During the hour you drove at varying rates of speed from 30 to 60 MPH according to your speedometer. But your average speed after one hour was 45 MPH and you traveled 45 miles. Because of the traffic your average speed was a lot slower than the speed limit.

GDP is reported like your car’s speedometer. For each quarter the BEA reports the annual rate for the quarter. The chart below shows the quarterly Real GDP. You can see that the rate of output dropped in the first two quarters of 2009. Then the economy started speeding up in the third and fourth quarters. The rate of output during Q4 2009 was slightly higher than during Q4 2008.

The actual quarterly figures for 2008 and 2009 are shown in Table 1. The rate of output peaked in Q2 2008. For the first three quarters, the rate of output in 2009 was lower than 2008. Only in the fourth quarter did the rate pickup and surpass 2008 by a slight +0.10 %.

Does this Mean the Economy is Out of the Woods?
In a word, no. For one thing, the year-over-year growth in Q4 2009 is a miniscule +.10%, and it Q4 2008 was already down well below the peak output seen in Q2 2008. The rate of output is still below the peak.

For another thing, Q4 GDP figures are for the advance release. Only some of the data to measure GDP ha been collected. The next two releases of Q4 GDP report, preliminary and final become available one and two months after the advance release. The might be further refinements later in the year as well. Expect large revisions to the numbers. That +0.10% increase could easily become a -2% decrease.

A third issue is how much of the GDP is natural and how much is artificial.

To prop up the economy, the federal government has been running massive stimulus programs which require running huge budget deficits. For 2010, the budget deficit is projected to be 1.35 trillion dollars. If that money was removed from the economy, GDP would be much lower. So in a real sense the GDP speedup (growth) we have seen is from borrowing money. That is like a family living beyond its means by making purchases on their credit cards. It is not sustainable.

But the elephant in the room is jobs. The question is how can output grow when U-6 Unemployment is up around 17%? Idle workers mean missed income. Wages are what people use to buy goods and services which creates demand for products. Recall the Circular Flow chart.

Final Answer
So why were the headlines positive for Q4 2009 GDP?
The answer is because headline writers focused on the quarter-over-quarter change in GDP, which is the wrong thing to look at. If you look at the actual GDP numbers and the year-over-year changes, they don’t look so hot.