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Why is real GDP growing in a recession?


As I noted yesterday, we have now been in recession for a year, but reported real GDP has actually risen. How can that be?

I’ve looked a bit deeper into this. One of the big problems, I think, is the measurement of the manufacturing sector. According to the BEA’s figures, production of goods in the U.S. has risen since the end of 2007 (for those of you keeping track at home, that’s Table 1.2.6. Real Gross Domestic Product by Major Type of Product, Chained Dollars).

Let’s repeat that…the GDP figures show that production of goods in the U.S. is up from the fourth quarter of 2007 to the third quarter of 2008. However, every other measure of manufacturing shows a very different picture. Manufacturing employment, output, and industrial production are all down sharply over the same stretch.

If we assume that real goods production is actually falling across this period, it pulls real GDP growth since the end of 2007 into the negative column as well.

Now, why should goods production be mismeasured? I think the answer is ‘phantom GDP’ (see here). But that’s for another post.

Added clarification:

Nominal goods produced = goods purchased by consumers + goods purchased by government + investment goods purchased by businesses + exported goods + inventory accumulation - imported goods


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