Gross Domestic Product is a measure of the nation’s economic activity. The statistic measures the sum of the nation’s production for both the private and public sectors. A nation with an increasing GDP in real terms is considered to be growing, while one with a declining GDP in real terms is in recession. (NOTE: By Real economists mean adjusted for inflation and population).
The Federal Government’s first projection of GDP for the 1st quarter of 2014 was released, showing that the economy went to a virtual standstill during the first 3 months of the year. This follows revised growth for 2013 of just 1.9 percent, well off the 2.8 percent growth rate reported in the prior year. Comparing the 1st quarter to a poor showing for the economy in 2013 shows just how bad the early indicators for economic growth in 2014 actually are. While GDP is supposed to be a measure of production, the government actually produces a statistic based on consumption figures, and as everyone knows, consuming something is totally different than producing it. For example, based on how GDP is calculated, if we were to dig up all of the interstates in the country and pile the concrete up to produce pyramids, we would be consuming and therefore growing the economy, so there are obvious problems with the statistic. Even so, one can garner some idea of how the economy is preforming and it is actually measured by the government using consumption expenditures. In the 1st quarter overall consumption grew by 0.1 percent with all of this coming from consumer spending. In fact, higher consumer spending was offset by reductions in investment spending (what actually grows the economy), and higher imports. So consumers bought a lot of foreign produced products in the 1st quarter of 2014. Every other measure was also down, inventories fell as did government spending at both the state and local levels.
Digging deeper into the data, things get worse. Even the consumer spending increases are not real. In fact, consumer spending on physical goods was nearly flat, up by a paltry 0.4 percent. It was actually spending on services that drove the economy into positive territory during the 1st quarter, and of that, 56 percent was from higher health care spending. In other words, based on how the Bureau of Economic Analysis reports GDP, 1st quarter figures would have been down by 1 percent had not the increased costs of the “Affordable” Care Act not intervened.
A one quarter reduction in GDP does not a recession make, and it is likely that this number will be revised in a month (although if, as many pundits are reporting, nobody actually is paying their Obamacare premiums that may take the number down even more), but this does show that booming asset markets are not actually benefitting the economy. Businesses and industries should be concerned about slow GDP growth because the overall level of income available to customers tracks this number. The economy is starting to generate some job growth, but if GDP does not rise along with jobs, it would indicate that average wages and income are falling and will continue to fall. This is how inflation has manifested itself during this recovery, and there is nothing on the horizon to indicate that the American worker and consumer will fare any better in 2014.
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