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It's All about Context...Key Drivers of Economic Growth

One of the most closely watched measures of U.S. economic health is gross domestic product (GDP). GDP represents the output (total dollar value) of all goods and services produced by labor and property located in the U.S. A positive GDP indicates economic expansion and two consecutive quarters of negative GDP indicates a recession.

While some media noisemakers refuse to acknowledge that the economy continues to improve, the Bureau of Economic Analysis (BEA) reports that real GDP increased in the first two quarters of 2012 (January – March and April – June). In fact, the overall US economy has actually grown for 12 consecutive quarters since July of 2009, as represented by the black bars in chart below. The red bars represent the GDP forecast by 51 of the most respected economists.1 The GDP forecast doesn't resemble the results of the mid to late 1990s, but they do indicate positive growth over the next six quarters. (Please be aware that anything can happen to alter the forecasts—either positively or negatively).

 b2ap3_thumbnail_new-picture-1.png

GDP consists of five broad components:

1. Government Consumption

2. Investment

3. Services

4. Non-durable goods

5. Durable goods

This chart shows the aggregate contribution of each component to GDP since 1995.2 Items 3-5 above represent consumer spending, which accounts for 69% of GDP

b2ap3_thumbnail_new-picture-2b.png

Although we hear a lot about durable goods and business investment in the media, they are actually smaller contributors of total GDP. Consumption of services by consumers is by far the single largest contributor to GDP and the demand for services is not very cyclical. Since consumer spending is the key driver to US economic growth, the key question is whether it is reasonable to think that consumer spending—and therefore the economic recovery—will continue? We’ll address this next time.

Let me close by saying, if you only listen to the pundits and sound bites, you would believe the economy is a complete wreck and consumers are hurting. However, when you examine the actual numbers, see the trends, and compare and contrast with previous periods, you can put things in proper context. You may have an opinion and feel a certain way about the economic recovery—and even find anecdotal evidence to support that opinion—but the facts are the facts.

________

Sources:

1. Wall Street Journal survey taken August 3-6, 2012.

2. Bureau of Economic Analysis, data through June 2102.

It's All About Context...Consumer Spending
It's All about Context...The Coming Recession

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