Gross Domestic Product (GDP) is a monetary measure of goods and services produced in a country. It is essentially an economic indicator, a snapshot of growth (or the lack of) within a country. In other words, measuring GDP allows us to assess our national productivity, suggesting the relative short-term direction that our economy is headed. Keep in mind my expression “relative short term”, as I’ll address this later in the reading.
I’m not attempting to give a course on GDP. But you may wonder, with such a simple definition, why do economists and politicians defer on our economic status relating to GDP? Are we, or are we not in a recession? While it is tempting to attribute discrepancy blame to the different political agendas, and you’re not entirely wrong, most non financially trained individuals ignore the most important element to analyzing economic indicators, and that is timing. From Consumer Price index (CPI) to Unemployment Rate, from Home Sales to Retail Sales, there’s an extensive list of leading and lagging economic indicators that economists, asset managers and investors use to deduce the status of the overall economy. These statistics help guide us in developing prescriptive measures to navigate the turmoil. We’ll dive deeper into these indicators in a future reading.
Back to the element of timing. While the majority of leading indicators are reported on a Monthly basis, GDP is reported on a Quarterly basis. Timing here makes a big difference. The U.S. Bureau of Economic Analysis (BEA) states that “understanding the economy helps the public and policymakers make informed decisions.” While I support that assumption, you see, if you wait to make portfolio allocation decisions based on recently reported GDP numbers, your financial plan can also be yesterday’s news...as in a “Quarter old” news. I'm not suggesting a portfolio needs to be updated every time economic indicators change. Allow me to explain further.
GDP is the sum of the following elements: consumer spending, business spending, government spending and net exports (C + I + G + NX = GDP). I had a memorable college professor that would tell us “You don’t have to go to Harvard to figure stuff out”, and I mean no disrespect to my Harvard graduate readers. Nonetheless, Professor Ojeda is right again. If you break down the data provided by each element of the GDP equation, when it is initially reported monthly by each government agency, you can get a fairly accurate estimate of what that quarter’s GDP will be. That level of statistical analysis of data is what allows us trained financial individuals to intuitively arrive to a modestly accurate conclusion as to where the economy is and where it’s headed. We don’t wait for CNN, Fox, CNBC or any other major news channel to report it. By then, GDP is old news.
Remember the phrase I asked you to remember at the beginning of the reading? I wrote: “the relative short-term direction of an economy”. I use the term relative, because even though a quarter is 90 days, our brains tend to determine what are short and long terms based on an almost direct correlation to pain and expectation. 90 days can seem very long for you, while for others….90 days is just 90 days. This is an unquantifiable aspect of economic behavior, and therefore unmeasurable, unlike other economic indicators. And I say this, because I’ve learned that the more educated people become on these topics, the greater the confidence they’ll assert in financial decision making.
But, since there's a high possibility you have very little interest in acquiring and compartmentalizing all the numerical data that economic decisions and portfolio managing entails, and since you’re still going to watch cable news and accept that as your most up-to-date source of information, at the very least read our commentaries.
You know...the commentaries of those like us who have the uncommon desire to engage in constant analysis and modeling of economic drivers, A.K.A. “The Boring stuff”.