GDP: Measuring the Economy

If you’ve been listening to the news over the past few years, you’ve probably heard a lot about gross domestic product (GDP) in relation to the Great Recession and the economic recovery. When GDP falls for an extended period, it may signal the beginning of tough economic times. Conversely, a rising GDP may indicate an improving economy and the potential for better times.

Gross domestic product is the total value of goods and services produced in the United States. This includes consumer spending, government spending, business capital investment, and net exports (the value of exported goods minus the value of imported goods). You might look at GDP as a speedometer that measures how fast the nation’s economic engine is running.

What GDP Tells Us

The total dollar value of GDP provides perspective on the size of a nation’s economy. The United States has the highest GDP in the world — about two and a half times greater than China’s, the second-largest national economy.¹

What matters more for investors, however, is GDP growth. When gross domestic product grows, it may help contribute to higher corporate earnings. Interestingly, research has failed to prove that stock market performance has a positive correlation with GDP growth.²

Gross domestic product may also affect interest rates. When GDP growth is slow, the Federal Reserve may keep interest rates low in an effort to stimulate the economy, as it has done since 2008. On the other hand, if GDP rises too quickly, the Fed typically becomes concerned with potential inflation and may raise interest rates in an effort to keep the economy from growing too fast.

Keeping an eye on GDP may be helpful in gauging the overall health of the economy. Yet it could be unwise to place too much emphasis on GDP when making investment decisions.

1) International Monetary Fund, 2011
2) Financial Times, January 12, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2012 Emerald.

Craig Mendenhall, Steve Pilger, and Trina Good offer securities products & services through Royal Alliance Associates, Inc. Member FINRA/SIPC, a registered broker-dealer. In this regard, this communication is strictly intended for individuals residing in the states of Alaska, Arizona, California, Idaho, Ohio, Oregon, Texas, and Washington. No offers may be made or accepted from any resident outside the specific state(s) referenced.

Craig Mendenhall and Steve Pilger offer advisory services in the state of Washingtion through BBM Financial Services, a registered investment advisor, not affiliated with Royal Alliance Associates. Craig Mendenhall offers additional advisory services through Royal Alliance Associates, Inc.

A broker/dealer, investment advisor, BD agent or IA representative may only transact business in a particular state after licensure or satisfying qualification requirements of that state, or only if they are excluded or exempted from the state`s broker/dealer, investment advisor, BD agent or IA rep requirements, as the case may be: and follow up, individualized responses to consumers in a particular state by a broker/dealer, investment advisor, BD agent, or IA rep that involve either the effecting or attempting to effect transactions in securities or the rendering of personal investment advice for compensation, as the case may be, shall not be made without first complying with the state`s broker/ dealer, investment advisor, DB agent or IA rep requirements, or pursuant to an applicable state exemption or exclusion. For information concerning the licensure status or disciplinary history of a broker/dealer, investment advisor, BD agent, or IA rep, a consumer should contact his or her state securities law administrator.