Chart: Our Shrinking Economy

On Friday, the Bureau of Economic Analysis announced
a sharp decline in real gross domestic product — the sum of all goods and services sold in the United States, adjusted for inflation.

The BEA's big number was -6.2 percent, which is the amount the U.S. economy would have declined if it had sustained four quarters identical to the last one. Annualized percentage rates are a standard convention in finance; even when they describe a period of time other than a full year, economists and bankers prefer knowing that all percentage rates express annual projections.

GDP is calculated by adding four numbers: (1) consumption, (2) gross investment, (3) government spending and (4) net exports.

 

1. Consumption means short-term goods and services purchased by private consumers. Examples include rent, food, subway fares and entertainment.
2. Gross investment is the amount private companies and people spent to purchase goods and services intended for long-term usage. Examples include new homes and factories.
3. Government spending includes all expenditures by all levels of public agencies on both goods (i.e. procuring equipment) and services (salaries).
4. Net exports: The difference between the total value of all goods and services exported from the United States and those imported from abroad. If the next exports number is negative (as it has been since 1982), the United States is said to be running a trade deficit; the opposite is a trade surplus.

In the chart above, the four components may not appear to have changed much, yet the represent the overall picture as the country sank into a devastating recession. But to an economist, the chart paints a terrifying picture, because growth has powered the economy — and this is a picture of no growth.

Even the modest dips in this graph represents billions of dollars of lost sales. In these difficult economic times, consumers cut spending in a wide range of categories, moving, for example, from premium food brands to generics. This is reflected in the falling share of personal consumption in overall GDP:

While this movement represents a drop of less than 2 percent, it's 2 percent of a very, very large number (somewhere around $11 trillion).

Economists do not anticipate that this quarter, the first of 2009, will be much better:
according to MarketWatch, the consensus is for an annualized decline of 4.8 percent, which would be the first time since World War II that the American economy experienced back-to-back falls greater than 4 percent.

The one positive trend was in the final number — the difference between exports and imports. Because American demand for foreign products fell faster than international demand for American products, the balance of trade, which had lingered at a deficit of around $600 billion dollars, improved by over 40 percent in the past two years.

Although an increase in several hundred billion dollars would look small on the first graph, such movements may begin to slow the decline. That's particularly likely if the dollar continues to fall in relation to foreign currencies. A weaker dollar makes American goods more affordable to overseas customers.