Forward Outlook on the United States Gross Domestic Product Growth Rate

The U.S. GDP (gross domestic product) is one of the best ways to judge the health of our economy at any given point. My forecast of the U.S. GDP rate going forward is very sluggish. The forecast is based on several different components of the GDP. A brief summary of what GDP is along with a summary of the different components will help you to better understand exactly what the GDP indicates and what it means for you going forward. Recent historical events along with expected conditions in the future are good sources to base what the change in different component aspects may be. Economists use various indicators to measure the output and growth of an economy. The GDP has been coined “the godfather of the indicator world” (Barnes, 2011) because of its aggregate measurement. GDP puts a value on the total market of an economy. The total market is defined by final goods and services produced within the year. When real GDP is referred to, it is talking about the inflation adjusted GDP. It makes comparing growth during different time periods easier. GDP Reports for the United States are released the last day of each quarter by the Bureau of Economic Analysis and “historically averaged about 2.5-3% per year but with substantial deviations” (Barnes, 2011). The amount the GDP rises or falls can be influenced by a change in any of the numerous components that help to make up the number.  The components include total consumption, government spending, investment, and the value of exports less the value of imports. Each component is a different percentage of the GDP, and the higher that percentage, the greater of an affect it has on the overall GDP numbers. Each component is influenced by another set of variables, which is how the GDP is able to encompass such an aggregate measurement of an economies health.

            Consumption makes up the largest part of the U.S. GDP. “It has been in the high 60 to low 70 percent range since the end of the dot com boom”(Ollodar, 2011) in 2000. One of the primary reasons for the steady rise in consumption is due to the steady increase in non-durable goods and services. Just today, The Census Bureau of the Department of Commerce released retail sales numbers of 1.1% which was lower than analysts’ estimates of 1.2% probably due to high unemployment rates. That means that America’s gauge on consumer sentiment is creeping lower still. After thorough research,  I do not predict a decrease or substantial increase in consumption,  which do little to help the growth of the U.S. GDP.

            Government spending will probably be the one component of the GDP that works against its growth the most. With the government trying to reduce the federal deficit, we can not only expect for this number not to grow, we should see a steady decline moving forward. Currently, government spending accounts for around 20% of the U.S. GPD. The U.S. cash deficit accounts for -10.44% of the GDP meaning that if it is ever completely paid back it would take 10.44% of the GDP with it. The national “defense spending, as a percentage of GDP, has trended down … since 1950” (Ollodar, 2011).  All of these factors will be responsible for weighing down the GDP in the future.

            Investment is the next component of the GDP that could give us an indicator of the future growth rate. The investment category is mostly comprised of business inventories and residential investments like home construction. Residential investments made up over 6% of the U.S. GDP preceding the housing bubble. Currently, it makes up 2.5%. Because the long term average of residential investments is 4.7%, we can expect to see a steady increase over time to numbers close to the average. How long that is going to take is the next factor that we have to consider. With the current economic numbers we have been seeing, it is likely that it is going to be a long recovery. On the positive side, I do not predict any further decrease in the residential investment numbers.

            Trade has been a negative percentage of the GDP since the late 1970’s. We have encountered lows of more than -6% of our GDP. Currently, it accounts for around 4% however, increasing oil import are responsible for most of this number. In the short term, we should see an increase in growth rate because we are still coming down off of the spike in oil priced from the beginning of the year. The long term price of oil is a different story. The supply of oil is diminishing which will inevitably lead to an increase in oil prices over time, causing an even greater negative impact on U.S. GDP. Unless we are able to find energy solutions right here is the U.S. (i.e. clean energy) we can almost count on oil hindering the growth rate of the U.S.

            After dissecting each of the different components that make up the majority of the GDP, I am predicting U.S. GDP growth rate to remain steadily slow indefinitely. The U.S. has a lot of changes to address before we see any real sustainable economic growth. The U.S. entering into a recession (two consecutive quarters of negative growth) is possible but unlikely.

           

References

Barnes, R. (2011). Economic Indicators: Gross Domestic Product (GDP). Retrieved October 13, 2011, from Investopedia: http://www.investopedia.com/university/releases/gdp.asp#axzz1afPUlB62

Ollodar, B. (2011, October 10). GDP Component Trends. Retrieved October 14, 2011, from dshort.com: http://www.advisorperspectives.com/dshort/guest/Bruce-Ollodart-111010-GDP-Component-Trends.php