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 2nd quarter of 2014 increased at an annual rate of 4.0 percent, while the estimate for first quarter GDP was revised to a 2.1 percent decrease. While it is good to see this strong growth, it is important to understand that these estimates are based on very preliminary data, and revisions of as much as 30 or 40 percent are common.
The advance in the 2nd quarter is fortunately quite broad-based, but inventory growth accounted for about half of the total (or 1.7 points of the 4.0 percent increase). The other major factor was growth in GDP over the quarter was consumption (which also accounted for about 1.7 points of the 4.0 percent increase). In other words, consumption and a piling up of inventories accounted for most of the reported growth in production. This is not sustainable in the long term and likely will not carry forward into the 3rd quarter. Interestingly, most of the growth in inventories reflects replenishment of inventory reductions in the 1st quarter which helped to drive the bad headline numbers three months earlier. This may reflect some of the effects of the bad weather conditions in the later part of the winter.
Just as the one quarter reduction in GDP did not a recession make, the 2nd quarter figures do not suggest that growth is at hand. In fact, over the past 4 quarters, GDP is up by just $675.5 billion or about $215 per person. To put this in perspective, the American economy grew by about enough to provide every citizen with an iPhone. When adjusted for population growth, per capita GDP growth has been pretty anemic over the past couple of years.
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 any faster it will be impossible to increase wages, and continue to generate corporate profits and tax revenues.
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