The concept of Gross Domestic Product (GDP) was developed in the 1930s to provide a measure of overall domestic economic activity.
It measures the value of final goods and services purchased by consumers.
It includes three components: Consumption, investment and government spending.
Recently, the government announced the second consecutive quarterly decline in real (inflation-adjusted) GDP.
What should we take from that 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 about it.
In my lifetime so far (1947 to 2022) real GDP per capita has increased by a factor of four – $14,000 to $58,000.
However, GDP does not automatically increase every quarter.
We live in a very complex economy with many factors affecting activity. From time to time, economic activity will actually decline.
These declines can last for a period of time and are called recessions.
The National Bureau of Economic Research (NBER) is charged, among other things, with tracking US economic activity and determining when the economy is expanding or contracting (in recession).
It does this using many economic measures.
The NBER identified 12 recessions between 1948 and 2020.
Unfortunately for decision makers and policy makers, the NBER only makes its determination after the fact.
Wouldn’t it be useful to have an indication of that state available in real time? We can use it to make better decisions.
Well, GDP comes to the rescue.
I compared the NBER’s list of recessions since 1948 with real GDP declines. Real GDP fell in 11 of the period’s 12 recessions. It fell in two or more quarters in a row nine times, for one quarter twice and a recession – not at all.
Moreover, there has not been a decline in real GDP since 1948 without a recession being present. Real GDP decline is a very good real-time indicator of recessions.
Unfortunately, the mainstream media denies the obvious. Take the Associated Press front-page article in the July 28 Altoona Mirror – in which the second straight quarterly decline in real GDP is just “increasing fear” of the recession.
No. Two consecutive declines in quarterly real GDP, we just clearly experienced recession.
But for AP and other mainstream media, this news is politically inconvenient.
So our truth ministries ignore statistical evidence! Instead, they note that rising unemployment (which is currently absent) usually accompanies recessions—which is true.
But employment has yet to recover 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, but the opposite. And it does nothing to refute the historical record that falling real GDP signals recessions.
Christopher Gable resides in Altoona.