The concept of Gross Domestic Product (GDP) was developed in the 1930s to provide a measure of overall economic activity within a country.
It measures the value of the final goods or services purchased by the consumer.
It sums up three factors: consumption, investment, and government expenditure.
Recently, the government announced that real (inflation-adjusted) GDP had fallen for two straight quarters.
What should we learn from the news?
The US economy is growing all the time.
Its growth is the source of our rising standard of living. GDP measures our standard of living and its growth.
During my lifetime (1947 to 2022), real GDP per capita has grown fourfold — from $14,000 to $58,000.
However, GDP does not automatically increase from quarter to quarter.
We live in a highly complex economy with many factors that influence activity. Sometimes economic activity actually declines.
These declines can last for a period of time and are called recessions.
The National Bureau of Economic Research (NBER) is responsible, among other things, for tracking US economic activity and determining when the economy is expanding or contracting (a recession).
It is done using a great many economic means.
The NBER has identified 12 recessions between 1948 and 2020.
Unfortunately for decision makers and policy makers, the NBER makes decisions after the fact.
Wouldn’t it be nice to have a real-time indicator of that condition available? You can use it to make better decisions.
Well, GDP rides to the rescue.
We compared the NBER’s list of recessions since 1948 with the decline in real GDP. Real GDP fell in 11 of his 12 recessions over this period. Nine times in more than two quarters in a row, two times in one quarter, and one recession, but none.
Moreover, since 1948, real GDP has not fallen unless there is a recession. A decline in real GDP is a very good real-time indicator of a recession.
Unfortunately, mainstream media deny the obvious. Take a look at his AP article on the front page of his Altoona Mirror on July 28th — his second consecutive quarterly decline in real GDP is marginal ‘Increase Fear’ of depression.
No, two consecutive quarters of declining real GDP clearly indicate a recession.
But for the AP and other major media outlets, the news is politically inconvenient.
So our Ministry of Truth ignores the statistical evidence! Instead, they note that rising unemployment (currently none) usually accompanies recession. This is true.
However, employment has yet to recover to pre-pandemic levels as many simply left the workforce. Unemployment is low due to the lack of available labor.
This does not indicate the health of the economy, rather the opposite. And it does not refute the historical record that falling real GDP is a sign of recession.
Christopher Gable lives in Altoona.