Quantifying the Economy

I mentioned last month that it’s likely the economy bottomed.  I still think that’s true, though we won’t see blinding evidence of this for quite some time, but there are strong indicators that it’s already happened.  My biggest concern is economic growth, because the faster the economy grows, the faster our lives get easier and more stable. How do we measure economic growth?  One of the most widely used indicators is GDP or Gross Domestic Product.  It’s the value of everything we produce in the country.  Another way to look at it is the sum of all of our incomes.  So GDP is basically the nation’s yearly salary.  Currently, it is about $13.86 trillion. A year ago, it was well over $14 trillion if I remember correctly.  So, GDP is a good piece of data to look at, but unfortunately, it doesn’t tell us what’s happening up to the minute.  Lets take a look at how GDP is reported.

GDP growth is calculated for a three month period, or quarter, and released at the end of every month on an annualized basis.  The first month after each quarter (Q1: Jan.-Mar., Q2: Apr.-Jun., Q3: Jul.-Sep., Q4: Oct.-Dec.) we get an advanced reading, which has a lot of estimates since the data isn’t all out that soon after the end of the quarter.  A month later, we get a revision called “preliminary GDP” and then in the 3rd month we get “final GDP.”  We end with the best estimate for economic growth for the previous quarter at the end of the following quarter, but these are still subject to revisions in the months (and years) ahead.  Still, it is a useful measurement for how much our economy improved.

So, at the end of July, we will have the preliminary GDP reading on the 2nd quarter (Apr. – Jun.).  I expect 2nd quarter GDP to end up between -1.0% and 0.0%, and I’m hoping for as close to flat as possible.  The consensus forecast is -1.5%, but luckily(?), they are often pessimistic.  Since Q2 contains the end of the recession and the very early start of the recovery, the average of the two will determine how positive or negative the quarter is.  What this means though, is that all of Q3 will be positive, and it could be hugely so, in the 3% region.  The down side being we won’t actually get the first real positive number until late October.

You’ll be hearing for many months to come that the economy is doing poorly, but just keep in mind that it’s already hit bottom and doing better.  The media thrives on bad news and isn’t brave enough to admit the recovery until it is completely obvious.

On a related note:  I believe the economy would have rebounded now whether or not the “Stimulous Package” was made law.  The stimulus will do something (good or bad no one can really know), but it hasn’t had a chance to do much of anything yet.  This won’t stop the government from taking credit for every good data point though, so when they do, try to take it with a grain of salt.

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2 Responses to “Quantifying the Economy”

  1. Nick Harmon Says:

    is GDP really a good measure of economic heath? It includes government spending which of course will be increasing now. But just because a government spends a lot of money, does that mean the overall economic situation is good?

  2. mikehinton Says:

    That’s a good question. I’ve wondered that myself. Under normal circumstances, the government adds 0.3% to economic growth. In a good year (3% overall growth), that means government contributes 10% to overall growth, which isn’t too bad in my opinion. My guess is, government growth isn’t as beneficial as private sector growth, but it may just be that the bigger government share of the economy is, the lower the upper limit on economic growth becomes. I guess my point is that GDP is not a perfect indicator, but it is the most widely referenced, and I think sufficient until I am convinced something else is far better.

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