The Latest on GDP

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the GDP.

• The broadest measurement of national economic health showed a slight improvement.  The GDP advanced 2.4 percent in the fourth quarter of last year.  Both consumers and businesses spent more.  But the federal government pulled back, quite sizably, on national defense.  Exports rose faster than imports, thus reducing trade deficit.
• The 2.4 percent growth is below the historical average of 3 to 3.5 percent.  This measurement can also be viewed as the total income of the country (everyone’s income all combined from wages, dividends, rents, profits, etc.).  So the increase generally means more job creation in the upcoming months.  NAR estimates 2 to 2.5 million net new jobs in 2014.
• Somewhat technically: GDP growth was also caused by inventory accumulation at warehouses.  Companies will slow the production process in order to burn off some of the inventory.  GDP in the first quarter of 2014, thus, could be even slower than the latest, falling below 2 percent.
• One mystery on the ongoing sluggish economic expansion is the evident lack of business confidence.  Big companies are flush with profits and are expanding slowly.  Small businesses generally need to borrow to expand.  Spending by all businesses therefore tends to be notably higher than corporate profits.  That is not the case in recent years.  Businesses are just not confident about expanding.  Look at that chart below.
• The GDP figure is criticized by some economists and many social scientists as being too focused on dollar measurements.  Many important human activities are not measurable in dollars and not counted.  A mother’s conversations with a toddler, which has shown to be one of the best predictor of a child’s future economic success, are not and cannot be measured.  People not smoking reduces consumer spending dollars and GDP, but improves the quality of air and health.  There is something to be said of Counting the Stars and no more counting dollars, as a popular song would have it.  Still, however imperfectly, GDP clearly shows which country is living well and which are not.  One does not want to be in Venezuela today as its GDP is spiraling downward.