Gross Domestic Product (GDP)
By now we’ve all heard or read about the rather disappointing advance estimate for the United States first quarter Real Gross Domestic Product (GDP). Now I think we call all agree we know what the GDP is, but for the rest of us who don’t work in the financial sector, I think a refresher may be welcomed J
The GDP (Gross Domestic Product) is an aggregate measure or the total economic production of a country. This figure represents the market value of all the goods and services produced by the economy during the period measured. This includes personal consumption, investments, government spending, and net exports (Exports add, imports subtract )
So what about the number for Q1 of 2014 so far? The Bureau of Economic Analysis’s advance estimate shows a real GDP growth of 0.1%. The key word here is “real”. Not that there is a “fake” GDP; it can be reported as nominal or real values. Nominal values may appear to be higher, because they do not adjust for inflation. Real values do adjust for inflation, and are calculated by using a GDP deflator, which we will investigate some other time…
So what are good figures for real GDP? The general definition of an economic recession is two consecutive quarters of negative GDP growth, so obviously negative growth is not so good. However, growth that is too rapid may incite inflationary concerns. According to Investopedia, the general consensus is that 2.5-3.5% per year growth in real GDP is the range of best overall benefit. The GDP may jump higher post-recession as the economy corrects itself, but in the long term, investors like to see the annual 3% growth.
Back to the Q1 estimate results for 2014; 0.1% doesn’t exactly have the zero(s) in the right place. However, it’s important to keep in mind that the values are annualized. If this rate of growth continues to the end of 2014, then yes, we have a very sad growth of 0.4% But think about this:
Home sales are generally lower in the winter months, because frankly, nobody wants to go out in the cold to look at homes surrounded by dormant vegetation. When the weather is nice and everything is growing and blooming, it’s not so bad being out and about looking at homes. It is logical to assume that real estate agents make most of their money when the real estate market is active. So does a slow January and February mean that the real estate agent is eating canned beans for the rest of the year? Of course not! (Unless they have a slow March through November as well.)
In the news, some are attributing the slow growth to the brutal winter weather. Here’s one: http://www.forbes.com/sites/samanthasharf/2014/04/30/u-s-gdp-grew-a-glacial-0-1-in-the-first-quarter-2014/
Obviously there are a myriad of factors that come into play, but I guess my point is that just because we had a weak first quarter doesn’t mean 2014 is doomed. If next quarter is 1.1% and the 3rd quarter is another 1%, followed by a good 4th quarter, it’s not so bad. There are countless other economic indicators that we will cover as they pop up in the news, and we will keep you posted on what they are, what they mean, and why we care.