GDP, or Gross Domestic Product, is a measure of the size of the economy put out by the U.S. government entity Bureau of Economic Analysis (BEA).
You can see the GDP changed rocked by the government response to Covid, and the economy coming back on in Q3 2020. Notice the relatively large positive change in Q4 ‘20 to Q4 ‘22 due to the government stimulus and continued reopening.
The actual GDP number is rarely reported - it’s the change in each quarter extended to an annual amount that is reported. For example, here’s the lead statement of the most recent report, May 26, 2022 - the second estimate on the first quarter of 2022:
“Real gross domestic product (GDP) decreased at an annual rate of 1.5 percent in the first quarter of 2022 (table 1), according to the "second" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 6.9 percent.”
If the percent change is negative - the economy has reduced in size. The term “recession” traditionally refers to two quarterly reductions (contractions) in a row.
The actual growth of the GDP over many years with recessions (contractions) shaded.
Recessions are normal, expected and infrequent. Thankfully the economy is fairly stable - it’s not a rollercoaster ride like the stock market.
The GDP formula is: GDP = C + I + G + (X-M). C is consumer spending, I is business investment, G is government spending, and (X-M) is net exports. X=Exports and M=Imports.
“X-M” is also referred to as the “trade deficit”. If that number is negative meaning we import more than we export, it would be called a “trade surplus”. We have not had an annual trade surplus since 1975!
An interesting fact here is that “stuff we buy'' from outside the USA is a SUBTRACTION from GDP. President Trump (and to some extent other past presidents) wanted to the USA produce more goods and services here in the USA to reduce imports and have that economic activity stay in our borders which would increase our GDP, jobs, etc. In other words, “reduce the trade deficit”. Covid has made us realize that we may rely too much on goods and services from outside.the USA, (supply chain shown to be the weak link) another reason to reduce “M”. I think it is concerning, for example, that we rely on China so much for pharmaceuticals including the sub elements that go into producing a huge portion of our critical medical needs. A significant portion of our population has from a modest to serious need for ongoing medications.
How does the USA rank in the world for GDP (size of economy)?
2021: #2 China $17.5 Trillion, #1 USA $23.0 Trillion
China has been gaining ground in the race for the largest economy. Certainly the USA has aided them significantly in that gain by farming out production to them. And much of that China has insisted on as a condition of gaining access to China’s market. It’s a large market, so that is an enticing proposal.
Another way to measure economic success - what is the total size of capitalized stock markets as a percent of the total world markets in a country?
2021: #3 China 5%, #1 USA 57%, #2 Japan: 7%
China is slowing growing in percentage of the world, but the USA retains a large lead, and China is not gaining ground in this measure of financial power in the world. Most global investors still treat China as an “emerging market” in part because they are communist and not considered a “free” country. Just since I’ve been doing business as an RIA, the USA has moved from around 45% to 57%, whereas China moved from about 2% to 5%.