What Exactly IS the U.S. Economy?

To make sure that GDP can be most accurately compared year-to-year, the Bureau of Economic Analysis (BEA) usually reports real GDP. To calculate real GDP, the BEA makes three important distinctions:

1. Imports and income from U.S. companies and people from outside the country are not included, so the impact of exchange rates and trade policies don't muddy up the number.
2. The effects of inflation are taken out.
3. Only the final product is counted, so that if someone in the U.S. makes shoelaces, and it is used to make shoes in the U.S. (there are a few companies left!) only the value of the shoe gets counted.

GDP is measured by the BEA quarterly. The BEA revises estimates as it receives better data throughout the next quarter. For a summary of all GDP releases since Q4 2006, see GDP Current Statistics

1. Most importantly, it is used to determine if the U.S. economy is growing more quickly or more slowly than the quarter before, or the same quarter the year before.
2. It is also used to compare the size of economies throughout the world.
3. It is to compare the relative growth rate of economies throughout the world.

The Federal Reserve (Fed) uses the GDP growth rate as one of the indications of whether the economy needs to be restrained or stimulated. (See The Federal Funds Rate and How It Works).

If GDP is slowing down, or is negative, then you should dust off your resume. Declining GDP usually leads to layoffs and unemployment, but it can take several months. Declining GDP means business revenues are down. It can take awhile before executives can put together a layoff list and package. If you follow GDP statistics, you can be better prepared.

You could also use the GDP report from the BEA to look at which sectors of the economy are growing and which are declining. This would help you determine whether you should invest in, say, a tech-specific mutual fund vs a fund that focuses on agribusiness. It can also help you find training in sectors that are growing. Even during The Great Recession, healthcare related industries continued to hire.

The economy recovered from Katrina in Q1 2006 with a growth rate of 4.8%, and housing markets peaked. However, high oil prices during the summer caused the economy to slow below 2.5% for the rest of the year. GDP growth was 2.4% for Q2, 1.1% for Q3 and 2.1% for Q4. As a result, overall 2006 GDP growth was 2.8%, about flat with 2005 growth. (Source: BEA, GDP News Release 1/29/08)

GDP for 2008 was predictably sluggish: .9% in Q1, a slight rise to 2.8% in Q2, falling to -.5% in Q3. Most analysts expect Q4 GDP growth to be negative, as well. The Congressional Budget Office (CBO)forecasts 2008 GDP growth to be 1.2%. (Source: GDP Current Statistics)

That seems unlikely for five reasons:

1. First, the huge debt the U.S. is saddled with will limit further fiscal stimulus.
2. Home prices will stay flat through 2011, thanks to an 18-month foreclosure pipeline.
3. Commercial real estate will experience a decline through 2010.
4. Most corporate financial executives see another economic decline in 2010.

(Article updated December 13, 2009)