5.7 GDP Growth Misleading

Things are not always what they seem to be.

Despite the federal government’s positive report on GDP recently, most economists believe that the current growth numbers are misleading. Many of these economists are also skeptical about significant growth in GDP in 2010.

With real growth at rates below previous recessions in 1975 and 1982, jobless rates in the double digits and limited access to credit, many economists believe that the US economy is still weak.

The government mentioned GDP growing a whopping 5.7% during the 4th quarter of 2009. This is not impressive when you look behind the numbers.

To put that 5.7% figure into perspective you need to know that on average GDP grows around 3% +/- 1.5%. That is, GDP usually ranges between 1.5% to 4.5% growth. So a figure of 5.7% is massive growth.

Most of the growth came from businesses investing massive amounts of money in expanding their inventories. This method of GDP growth is not likely to be duplicated quarter after quarter.

GDP is calculated as: Consumer spending + Investment by businesses (including in inventory) + Government spending + Exports, net...or C + I + G + E = GDP. Normally, the allocation of GDP between these four broad categories is listed below:

C = 65-70%
I = 10-15%
G = 20-30%
E = -5%

In the 4th quarter, the investment by business was 3.4% of that 5.7%, or approximately 60% of the GDP figure. Remember that investment by business is typically only 10 to 15% of GDP so this was an anomaly.

Consumer spending which is usually 65 to 70% of GDP was only 25% in the 4th quarter of 2009. More precisely, it was 1.4% of the 5.7% of the GDP total.

Consumer spending is the oil that greases the economic wheel for the the US economy. This why Americans are goaded to spend, spend, and spend. When consumers stop spending because they are losing jobs, home values are falling, and equity cannot be pulled out of homes, consumers cut back on spending.

It is usually beneficial to look behind the numbers whenever the data is available. As Brothers Connected, that is what we plan to do for one another as we move forward together.