The concept of gross domestic product (GDP) was developed in the 1930s to provide a measure of global domestic economic activity.
It measures the value of final goods and services purchased by consumers.
It consists of three components: consumption, investment and public expenditure.
The government recently announced the second consecutive quarterly decline in real GDP (adjusted for inflation).
What should we take from this news?
The US economy grows most of the time.
This growth is the source of our rising standard of living. GDP measures our standard of living and its growth, and that’s why you should care.
In my lifetime so far (1947 to 2022) real GDP per capita has grown by a factor of four: between $14,000 and $58,000.
However, GDP does not automatically increase every quarter.
We live in a very complex economy with many factors influencing activity. From time to time, economic activity will decrease.
These declines can last for a certain period of time and are called recessions.
The National Bureau of Economic Research (NBER) is responsible for, among other things, tracking US economic activity and determining when the economy is expanding or contracting (in recession).
It does this by using a large number of economic measures.
NBER identified 12 recessions between 1948 and 2020.
Unfortunately for decision makers and policy makers, the NBER only makes its determination long after the fact.
Wouldn’t it be useful to have an indicator of this condition available in real time? We could use it to make better decisions.
Well, GDP comes to the rescue.
I compared the NBER’s list of recessions since 1948 to declines in real GDP. Real GDP declined in 11 of the period’s 12 recessions. It declined in two or more consecutive quarters nine times, during one quarter twice, and one recession, not at all.
Also, there have been no declines in real GDP since 1948 without a recession. Falling real GDP is a very good real-time indicator of recessions.
Unfortunately, the mainstream media denies the obvious. Take the Associated Press front-page story in the July 28 Altoona Mirror, in which the second consecutive quarterly decline in real GDP is only “raise fears” of recession
No. The two consecutive quarterly declines in real GDP that we have just experienced clearly indicate a recession.
But for the AP and other major media outlets, this news is politically inconvenient.
So our truth ministries ignore the statistical evidence! Instead, they note that rising unemployment (which is currently absent) usually accompanies recessions, which is true.
But employment has not yet recovered to pre-pandemic levels, as many people have simply dropped out of the workforce. We have a shortage of available labor, hence low unemployment.
This is not a sign of economic health, quite the opposite. And it does nothing to refute the historical record that real GDP declines are a sign of recession.
Christopher Gable resides in Altoona.
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