It might be hard to believe, but overall in 2008 the gross domestic product (GDP), which measures the value of all goods and services produced in U.S. economy, increased by 1.1 percent. As the chart below shows, an increase in net exports provided most of that growth, as exports increased and imports fell during the year.

The chart shows the contribution of the major components of GDP to annual increases for the past three years. Clearly, 2008 looks different from prior years. In most years, consumption is the biggest contributor to growth. In 2008, the major contributors were net exports and government spending. 

In each of the last three years, however, housing construction fell, contributing negatively to GDP growth.

This snapshot of the economy hides some of the significant changes in 2008. The second chart takes a closer look at GDP growth and the contribution of each component in each quarter of 2008.

GDP rose during the first two quarters of 2008, fell slightly in the third quarter, and fell precipitously (by 6.2 percent at an annual rate) in the fourth quarter. The chart illuminates the trends responsible for the rapid deterioration in the second half of the year. 

The housing market has been in crisis and new housing construction fell throughout 2008. Housing contributed negatively to the overall GDP growth in each quarter, but its negative impact was not significantly more pronounced in the second half of the year. The housing crisis did dampen growth in 2008, but it does not seem to be immediately responsible for the sharp drop during the last six months.

Two other variables, consumption (purchases of goods and services by households) and non-residential investment (purchases of structures and equipment by firms), changed directions midyear. They went from contributing positively to GDP growth to contributing negatively. Consumption has a significant influence on growth because consumption constitutes about two-thirds of GDP. As soon as consumption growth turned negative in the third quarter of 2008, overall GDP also decreased. Within consumption, purchases of durable goods fell throughout the year. But in the last six months purchases on non-durable goods have also decreased. It is a sign of a deepening recession that households began to cut down on their purchases of food and clothing, in addition to their purchases of furniture and appliances.

Non-residential investment grew until mid-2008. It fell slightly in the third quarter and fell significantly in the fourth quarter, exacerbating the downturn in GDP. 

Net exports (exports minus imports) contributed positively to the overall growth of GDP in the first three quarters, with an especially strong contribution in the second quarter. However, the strengthening dollar caused net exports to fall, and in the fourth quarter, net exports contributed negatively to GDP growth.

The only component of GDP that grew in the fourth quarter is government spending. Within this category, federal government spending increased, but state and local government spending fell in the fourth quarter. 

The composition of federal spending changed during the year. Federal spending grew the fastest in the third quarter, with most of the increase going to national defense. In contrast, in the fourth quarter, most of the spending increase went for non-defense purposes as the government enacted various policies aimed at stimulating the faltering economy.

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