GDP (Gross Domestic Product) is the term to measure the aggregate of all goods and services transacted in the United States. It is an indicator of our economy:
Bigger
Better
Stronger
The stronger the growth, the better, because it reflects our standard of living and many other things that transform our country. We are the number one country in the world from a GDP standpoint at $20.89T.
The next one is China at $14.72T which is still a lot, but at number two, but we’re way ahead of them.
When you think about GDP, you think about it in two ways:
1. Nominal GDP – the GDP itself
2. Real GDP – adjusted for inflation
Most of the time we’re talking about Real GDP because we can only spend the real dollars. For example: if it’s a cup of coffee and it costs me $7 to buy it, then it has gone up because it used to be $5. That’s material, right? It grew because of inflation. Growth from inflation is not as good as if it grew because we have more money, as in the GDP actually grew. In that case we could spend and buy as we please, and our standard of living would have increased. Economic growth, as opposed to inflation, is more productive in all those good things for the economy.
Where does our GDP Stand Now?
Every quarter the Federal Reserve issues their estimate of what the GDP will look like.
Let’s wind back the clock to March 2020 when we shut down the economy. The GDP went down, all the way down, and we had a recession, a very quick recession. Then all this money came in from what they call fiscal transfer, which is basically the government printing money and putting it all in our collective pockets.
The Federal Reserve printed money and also dropped the interest rate to zero, to make the entire financial system ready to do something – just stuffed with cash and liquidity. No surprise, the GDP went up:
- We are staying home
- We have nowhere to go
- We have lots of money
- We go online and shop
- We spend, and we spend, and we spend, and we spend.
People believe the GDP went down drastically because we shut down the economy in March 2020. There was nowhere to go. Money came in, good financial condition, bang, it went up, right? So, we had a moment of a V-shaped recovery…the shortest recovery known to man. And it was very V-shaped.
It came down and went back up. It went very high and that’s not sustainable unless we keep printing more money, which has its own issue – inflation. So, we went from very low to very high and it stayed high for a little bit and then started coming down. We did not expect it to be sustainable because it was artificial, so it is continuing to come down.
Currently, we are in a slowing economy as compared to that moment in time during the spring of 2020. The idea right now is, the GDP is still fairly good because we’re still spending. We have money left over from trillions of dollars that the government gave us, stored in our savings account. We continue spending. Eventually, we’re going to spend all of it. In fact, there are signs now that credit card balances are going up, and savings balances are coming down.
Which means we are spending money that we don’t have – not in checking, not in savings – but we’re spending it.
The GDP is just giving us a picture, a snapshot at any one moment in time. Continuing at this rate, the Federal Reserve expects we’ll be back down to 1.8%, in the long run, which is 2024. That’s the long-term expectation of Real GDP.
One more point that’s important to note, there are two mega-trends that are unyielding:
- Technology – is disinflationary because we can do more things with a single machine (i.e., a single phone, email’s free) In simple terms, technology is going to drive costs down, thus there will be no increase to the GDP.
- Aging population – Globally we have an aging population (older people don’t spend money the same as younger people)
So, what happens is technology is going to drive costs down which will not cause GDP to increase. Older populations spend money more on one-time things, not repeatable, (i.e., services, not buying goods but buying services). And services are also very low in terms of price which will not cause the GDP to increase.
In the long run, we believe that it’s all going to start coming back down. The questions are ‘when that would be?’ and ‘where would inflation be as we come down?’
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