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Friday, December 26, 2008

Real vs. Nominal GDP / Expectations for Q4 GDP

Below is a breakdown of the recent "Final Q3 08 GDP" release:

Nominal GDP growth in the recent quarter was relatively flat to the Q2 figure and at or above the nominal GDP growth levels from Q4 '07 and Q1 '08. Real GDP growth, however, was significantly lower than Q1 or Q2 due to an increase in the GDP Deflator. (If you're new to EconomPic, I recommend reading through this post as to what the GDP Deflator is AND how it can actually increase Real GDP relative to Nominal GDP if import prices rise).

In general, the price of imports were still rising during the third quarter, which means the import portion of the GDP Deflator decreased "real imports" relative to nominal imports. This in turn increased Real GDP relative to Nominal GDP in the quarter, but significantly less so than in previous quarters.

Looking forward to fourth quarter GDP growth, while many goods and services have decreased in price during the quarter (which will decrease the GDP Deflator), the GDP Deflator will not have the same "benefit" of higher priced imports. In fact, I suspect the huge drop in the price of oil will increase the size of the GDP Deflator from the latest quarter (i.e. a reversal of what happened in Q2 and Q3). This will be on top of what will likely be a negative nominal GDP figure.

In other words... in will not be pretty.