On January 29th 2010 the Bureau of Economic Analysis (BEA) announced their advance estimate of the real GDP for the fourth quarter of 2009 (2009IV). According to that estimate the GDP in 2005 value dollars increased 182 billion dollars over its level in the third quarter. This involved the incredibly high rate of growth of 5.7 percent per year over the third quarter level. Leaving aside the credibility of the growth consider where went the buying power generated by that increased rate of production. The $182 billion is an annual rate; the increased production in the fourth quarter was only one fourth that value; i.e., $45.5 billion.

According to the BEA the increase in real disposable income ($2005) for the fourth quarter over the third quarter was $52.8 billion at an annual rate or $13.2 billion in the quarter. The question is where did the other 71 percent of the buying power go?

Here is where it could go. For more this matter see GDP.

• Disposable Income of Consumers
• Business Saving (BS): Undistributed Corporate Profits Plus Capital Consumption Allowance (Retained Earnings plus Depreciation)
• Net Taxes (NT): Taxes Collected minus Transfer Payments Paid to Households and Interest Paid
• Net Transfers to Foreigners (NTF): Imports plus Net Government Transfers to Foreigners minus Exports

The data from the BEA published in the February 2010 issue of the Survey of Current Business does not provide the information for the fourth quarter of 2009 but it does for the third quarter.

First the figures are given below for the components of aggregate buying power in current value dollars.

The figures are imperfect and that shows up in terms of the difference between the sum of the components and GDP. However it is clear that one of the things that happen during a recession is that corporation retain more of their profits rather than paying it out as devidends. The recession occurred because corporations were frightened out of investing in plant and equipment because of the financial crisis of September of 2008. Ironically as they reduced there investment purchases they retained more of their earnings and thus reducing the dividend income of households.

The reduction of the components of aggregate buying power to real values provides some additional information.

The increase in GDP in 2005 value dollars of 2005III over 2005II was $71.5 billion. Real disposable income in 2005 value dollars decreased $32.5 billion in 2009III compared to 2009II. The value of Net Taxes in 2005 value dollars increased $5.4 billion in 2009III over 2009II. The increase in Net Transfers to Foreigners for 2009III over 2009II was $32.5 billion. The increase in business saving, defined as the undistributed corporate profits with inventory valuation and capital consumption adjustments, for 2009II over 2009II was $112.2 billion. The total of the net increases in buying power for 2009III over 2009II was $114.9 billion. The increase in GDP for 2009 over 2009II was only $71.5 billion so there is a discrepancy of $43.4 billion, indicating a possible conceptual error. However, there was a major change in the extent that businesses were selling off inventory without replacing it. In 2009II this disinvestment in inventory was $160.2 billion whereas in 2009III it fell to $139.2 billion. When businesses sell off inventory without replacing it they, in effect, get a capital gain if the price at which they sold the goods is higher that the price they paid for it. If they later replace that sold inventory the capital gain is taken back. It is uncertain as to whether this financial transaction is properly reflected in the GDP accounting.

Of the $182 billion increase in GDP in 2009IV over 2009III, $105.7 billion is accounted for by the reduction in the disinvestment in inventory. It is therefore likely that most of the increase in buying power generated by the increase in production went into business saving. For 2009IV the level of exports increased more than the level of imports so the net transfer to foreigners probably did not change much. The magnitude of the change in net taxes is likely to be about the same as the change for 2009III over 2009II. Thus most of the 71 percent of increased buying power from the increase in production for 2009IV probably went into business saving which then was put into the replenishment of inventories.