What is GDP and how does it relate to a recession?
GDP numbers are in the news today because the US GDP numbers increased. What is the GDP and how is it calculated? And how does it relate to the word recession?
First, GDP stands for Gross Domestic Product. Does it tell the full story of how the economy is doing? Not exactly but it is one way to get a gauge of how things are trending. What are the components of GDP?
Personal Consumption. This is how much stuff did we buy in the last quarter. This can be things like cars or furniture to items such as TVs, shoes, and food. In addition to spending on physical goods, spending on services is also included in this number. The personal consumption category is the largest component of GDP. We Americans love to consume.
Business investment-This is money that companies spend on growing and improving their business such as buying a new piece of manufacturing equipment. Changes in company inventory are also counted in this section. When inventories increase to match higher consumer demand, the GDP increases. Residential construction is also included in this.
The next one is everyone's favorite, government spending. Yes, when the government receives your tax dollars and spends on the military, salaries, or government programs that probably are not necessary, it counts for GDP. Just one more reason the politicians have to spend money.
Net exports-if we are exporting more than we are importing, then that counts as a positive number for GDP. This is a negative number most of the time since we import goods more than we export. This makes sense since everyone realizes that the US manufacturing base has decreased over the years.
https://fred.stlouisfed.org/release/tables?rid=53&eid=12998#snid=12999
So how does this relate to the word recession? Well, a recession is usually defined as 2 consecutive quarters of negative GDP. We had that in Q1 and Q2. Now, this Q3 number shows a GDP increase. So does that mean the recession is over? I guess by GDP numbers you could say so but we still have high inflation and numerous companies with poor earnings recently so I suspect we are not out of the woods yet. The best thing to do is to own quality investments and hold them for the long term. If you can do that and consistently invest during this time, your future self will thank you.
Phil Francois CFP®
Foundation Wealth Planning
phil@foundationwealthplanning.com