What Does Annual Real GDP Growth Teach Us?

Quarterly growth rates in real GDP receive a lot of media attention, and we hear a lot of comparisons of today's economic conditions to the Great Depression, but what about looking at annual real GDP growth over a longer period of time to get a little historical perspective? Tim Iacono makes that point here on Seeking Alpha. The chart above (click to enlarge) shows annual real GDP growth from 1930 to 2008.

Annual real GDP growth during the 2008 recession was +1.3%. Compare 2008 real GDP growth to Great Depression I, when there were 4 consecutive years of negative GDP growth, and real GDP in 1933 was -26.5% below the 1929 level. As bad as economic conditions are today, and even if they continue through 2009, any suggestions that we are in Great Depression II have to be dismissed. The current consensus WSJ forecast (based on 55 individual forecasts) is for -.30% real GDP growth in 2009. Assuming that forecast is correct, a +1.3% real GDP growth in 2008 followed by -.30% in 2009 would suggest that we would be nowhere close to Great Depression II, and wouldn't even be close to some of the more recent recessions (see chart below, click to enlarge).

Much of the discussion about the "worst economy since the Great Depression©" assumes that we are already close to the economic conditions of the 1930s. The chart below of annual real GDP growth from 1970-2008 shows that the economic conditions of 2008 (measured by real GDP growth) aren't even as bad yet as the 2001 recession, when real GDP grew at .80% for the year. And assuming the consensus forecast of -.30% real GDP growth for 2009 is accurate, the 2008-2009 recession (+1.3% and -0.30% consecutive growth rates) would be a little more severe the 1990-1991 recession (+1.9% and -0.20%), but less severe than the recessions of 1974-1975 and 1981-1982.

Comments

[bbzz24:]

in short: it teaches nothing.
since GDP numbers include government spending financed through debt as well (aka budget deficit) it makes no sense to look at GDP.
zimbabwe has triple digit GDP growth (adjusted for inflation) yet they are not the envy of the world.

Feb 05 04:38 AM

[strutzma:]

I second the point provided by bbzz24... Mark needs to break down these data to show the percent of GDP growth supplied by government spending, as well as include a separate histogram to show the increase in government spending throughout this same period. We need better presentation of these data.


On Feb 05 04:38 AM bbzz24 wrote:

> in short: it teaches nothing.
> since GDP numbers include government spending financed through debt
> as well (aka budget deficit) it makes no sense to look at GDP.<br/>zimbabw...
> has triple digit GDP growth (adjusted for inflation) yet they are
> not the envy of the world.

Feb 05 08:05 AM

[The Simple ...:]

Agreed with the previous commentators. In the real world, employment and inflation are more significant than GDP, and more keenly felt by the people who collectively comprise "the economy."

Feb 05 09:51 AM

[John Lounsbury:]

The most significant fact I read from the graph is the downward sloping trend line from 1970 to 2008. We have been losing real growth RATE for almost 40 years. This is something that needs to be included in the analysis of GDP. The trend is down. Why? Would the component analysis suggested by other commenters shed any light on this?

Feb 05 02:56 PM

[E.D. Hart:]

Real Inflation (non government numbers) are two to three times larger than reported cpi. Since GDP is calculated after subtracting inflation, real GDP is much lower than is reported, and the recession is more severe than reported.

Feb 05 06:40 PM

[Jan Baker:]

Abortion legalized in the 1973. Killing the consumer is usually bad for business. 50 million car buyers offed.


On Feb 05 02:56 PM John Lounsbury wrote:

> The most significant fact I read from the graph is the downward sloping
> trend line from 1970 to 2008. We have been losing real growth RATE
> for almost 40 years. This is something that needs to be included
> in the analysis of GDP. The trend is down. Why? Would the component
> analysis suggested by other commenters shed any light on this?

Feb 05 09:15 PM

[Moon Kil Woong:]

E.D. Hart is 100% right. Real GDP numbers today are not the Real GDP numbers of yesterday making graphics and comparisons misleading at best. It is sad that that is all we have been left to go on by the government. Apparently they think it's easier to manipulate the numbers than actually do anything to control inflation and stimulate real economic growth.

Interesting enough, it was Clinton's administration that is more to blame for skewed inflation numbers than Bush Jr. Why they felt compelled to do this when the economy was fine is always a head scratcher.

Feb 05 09:39 PM