The broadest measure of economic activity is the Gross Domestic Product (GDP), which is available from the Bureau of Economic Analysis (BEA). From an investment viewpoint, it is not used very much because it is only released every quarter and does not represent timely data for investors. However, it is important to know what it is and what information we can derive from these type of data.
The gross domestic product represents the output of goods and services produced by labor and property located in the United States. It is measured in dollar terms and is available quarterly by the Bureau of Economic Analyses. The gross domestic product is the sum of four elements: (1) personal consumption expenditures, (2) gross private domestic investments, (3) net exports of goods and services, and (4) government consumption expenditures.
Personal consumption expenditures represent what consumers spend on durable goods such as motor vehicles, parts, furniture, and non-durable goods such as food, clothing, gasoline and services such as electricity and gas, transportation and medical care. The importance of personal consumption expenditures is that they represent roughly 60% of the U.S. economy. It is because of the enormous size of this sector of the economy that much energy is spent by economists to understand the behavior of consumers.
The gross private domestic investments represent the sum of fixed investments and change in business inventories. Fixed investments represent investments in non-residential structures and producers' durable equipment – such as machinery used in a plant. Then there are fixed investments in residential structures such as single family and multi-family homes.
A key element in the gross domestic product is the net exports in goods and services. This is the difference between exports and imports. It is a very important measure because it has a major long-term impact on the dollar, and therefore, on the returns of foreign investments as we will discuss later. One of the main elements is that net exports eventually have to become positive because a country cannot experience a negative trade deficit, with imports greater than exports, for a very long time without having their currency sharply devalued.
The last element of the gross domestic product is government expenditures both at the federal and state level. Some economists say that the greater the size of the government expenditures as a percent of the GDP, the slower the growth of the economy over the long-term. The ultimate example is what happened to the Soviet Union where government expenditures were 100% of GDP. The outcome was a total collapse of the Soviet Union.
The concept of growth is relative to the average long-term growth of the economy and the average long-term growth of the economy can and does change, depending on the overall policies of the government. For instance, in the 1970s because of rising inflation and all the problems that rising inflation brought to the U.S. and the European economy, the average growth of the economy was very close to 2%. In the 1980s and 1990s as inflation came down, the average growth of the economy grew to 3% and even higher. The question now remains what is strong growth and weak growth? In the 1970s when the average growth rate of the economy was close to 2%, strong economic conditions would materialize when GDP grew at a rate above 2%. However, in the 1980s and 1990s as the average growth rate of GDP jumped to 3% due to major improvements in productivity, strong economic growth was experienced when business conditions expanded at a rate above 3%. Similarly, when the average growth rate of the economy was close to 2%, weak economic conditions would materialize when GDP grew at a rate below 2%.
The issue is that the concept of growth is a relative concept and depends on the economic times and we will see how inflation is one of the major determinants to understand and recognize the type of growth the economy will have.
(From my book Profiting in Bull or Bear Markets. Published also in Mandarin and on sale in China).
George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager
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