Economic Mystery: Why GDP Jumps, Sales Are Static
October 29, 1999
According to the Commerce Department, real Gross Domestic Product (GDP) increased at a 4.8% annual rate in the last quarter, up from 1.9% in the same quarter last year.
But the growth rate for final sales to domestic buyers (and what drives demand for freight transportation) was stable, rising only from 4.7% in the Spring to 4.9% in the Summer.
The big swing in the GDP growth rate was due to a huge gain in exports and a drop in inventories in the last quarter. This was a reverse of what happened in the previous quarter.
The good report will help sustain the current high levels of business and consumer confidence. It also confirms that inventories are lower than desired and that a new round of strong export growth has begun to the now rapidly growing economies in Asia and Europe.
The U.S. economy will remain at capacity at least through next year.This means growth at the maximum rate possible without igniting inflation. A few years ago, this was thought to be just over 2% but now it is likely 3%, possibly a little higher. The change is due to improvements in the labor market and, more importantly, a new measuring stick.
The Commerce Department has gradually changed the way inflation is measured, reducing the reported inflation rate as much as 0.5%. The latest GDP report has added business and government software purchases to GDP (yes, they used to ignore it). Together, these changes add about 0.7% of a percent to the economic growth rate.
So here's the new math: From now on, 3.0% economic growth is the same as what
2.3% used to be.