Money Mondays: What Actually Is... GDP
This is for the woman who sees GDP in a headline, skips past it, and moves on with her day because it has never once felt relevant to her actual life. About to change that. In three minutes. Let's go.
Not just what it is. But why it matters. And what to do about it.
Do You Feel Like..
Economic news feels like it's for someone else? Like it's a whole conversation happening in another room that doesn't include you? I used to feel that way too. GDP this. Growth rate that. Economists on TV arguing about decimal points. Instead of translating GDP to gross domestic product I want you to start thinking about it like a performance report for the economy. And when the economy gets a bad grade you feel it. In your job security. In your investment portfolio. In the price of everything at Whole Foods. Understanding GDP is like understanding the weather forecast before you choose the outfit to wear out.
GDP ā€” What It Actually Is
GDP stands for Gross Domestic Product. It is the total value of all the goods and services produced in a country in a given year. It's released every quarter and on an annual basis. It's a sum of every car built, every meal served, all the software sold, literally every service rendered. When you add it all up and you get GDP. It's basically the economy's annual performance review.
So when the annual performance review is good, that looks like businesses are producing more, people are working effectively and efficiently, money is moving. So think the year you actually got a raise and bonus. When GDP shrinks for two consecutive quarters that is the official definition of a recession (like now you're on a PIP (performance improvement plan)). Two bad quarters back to back and economists start using the R word and everyone panic and start a homestead because they don't know how the supply chain is going to survive another hit and even if it does no one can afford eggs to be $15 for a dozen again.
The US GDP is around $27 trillion. To put that in context that is not a number any human brain was designed to actually comprehend. Just know it's big and it moves and what direction it moves matters.
There are four things that make up GDP.
- Consumer spending: that's you and me buying things, one of our favorite things to do, which is actually about 70% of the whole number.
- Government spending: they're favorite thing to do. Like when they hire a private contractor to repave a federal highway, the department of defense buying a new jet or drone, a local school board funding the construction of a new school building.
- Business investment: think like a logistic company building new delivery trucks, big pharma spending money on R&D, a construction company building a new apartment complex.
- And net exports: what we sell to other countries minus what we buy from them.
Consumer spending being 70% means your behavior as a consumer is literally moving the economic needle. Every time you swipe your card you are participating in the GDP. Girl math says that makes shopping practically a patriotic duty. You're welcome America.
Why This Matters
Here is the practical version. When GDP is growing strongly, companies are profitable, hiring is up, the stock market tends to perform well. Good time to be invested. When GDP is shrinking or slowing, companies get cautious, layoffs happen, the market gets nervous. Not a time to panic, but a time to pay attention.
GDP growth also influences what the Federal Reserve does with interest rates. Yes queen, it's all starting to come together now.
Strong GDP: they might raise rates to keep inflation in check.
Weak GDP: they might cut rates to stimulate spending.
And as we covered in issue three, interest rates affect everything from your mortgage to your investment returns.
Hustle culture says keep your head down and grind regardless of what's happening in the economy. Smart investing says understand the economic environment and position accordingly.
You are not powerless against these numbers. You just have to know what they're telling you.
The performance review is public. The question is whether you're reading it.
You're an absolute queen. Know the score. Play the game smarter
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