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Third Quarter GDP is Higher Than Predicted, But What Does That Mean?

J. Mijin Cha

The third quarter GDP numbers were released this morning, which show a GDP increase of 2.8 percent, an increase from the 2.5 percent reported for the second quarter. Among other factors, increases in personal consumption and state and local government spending helped contribute to the increase in GDP. Of course, the state and local spending was offset by a negative contribution from federal government spending. The decrease in federal spending pre-dates the shutdown so we can expect that next quarter’s spending numbers will be even lower.

As always with GDP, we have to ask what is being measured? The third quarter numbers are higher than analysts predicted, which is used to indicate the economy picked up speed this summer. There was also a modest increase in consumer spending, which would seem to indicate that people have more disposable income, another sign thought to indicate a stronger economy. The construction sector showed strong growth, which is also pointed to as signs of a stronger economy.

Except, we know that these are not accurate portrayals of our economic reality. The unemployment rate for the summer was over 7 percent, lower than the previous four years but still not at pre-recession levels. Plus, the actual unemployment number is likely to be much higher. Unemployment also doesn’t impact all people equally: The unemployment rate of people with a bachelor’s degree or higher is 3.7 percent, while roughly 40 percent of African American men are not in the labor force. These complexities are reflected in GDP only as the overall unemployment rate.

As for consumer spending, as we’ve highlighted continually, this metric cannot reflect whether people are spending money that they have or if they are spending credit and further increasing their debt load. Spending, in and of itself, is not an indication of the economic health of households. Households increasing rely on credit cards to pay basic household expenses. So, if consumer spending is increasing because people have more basic expenses, like in response to cuts to SNAP or other safety net programs, it is not an indication of economic strength.

This last point really gets to one of the fundamental flaws of GDP—the inability to reflect income or economic inequality. Income inequality has reached an all-time high in the U.S. Yet, the country’s GDP is still increasing. If consumer spending is increasing because wealthy people are spending a record amount of money, GDP increases and it is reported that our economy is recovering. But, what if the reality is that while a few people can afford to spend lavishly, the majority of people are struggling just to make ends meet? We cannot shape the right public policy response because our main economic measure does not reflect these realities.

We need a better measure, like the Genuine Progress Indicator (GPI), that has a more sophisticated and complete view of the economy. The GPI uses 26 metrics to provide a more holistic view of progress, not just one-dimensional growth. And, in the end we should be measuring, and in turn valuing, progress not growth.