Tahoe Market Pulse: Taking the GDP for a ‘spin’
June 8, 2016
The economy grew at an anemic 0.8 percent annual rate in the first quarter and is expected to grow 2.5 percent in the second quarter. Fed Chair Yellen expects growth to pick up later in the year and next, but we've heard that before.
I remember when 3 percent growth was unacceptably low. Now it seems to be unattainably high. It's hard to put a good spin on these numbers. But let me try …
The April 30 issue of "The Economist" ran an interesting article claiming that gross domestic product (GDP) is a bad gauge of prosperity.
That wasn't an issue in the decades after World War II as GDP growth and living standards both rapidly advanced. More recently, GDP growth has slowed, which points to flat or declining living standards. Or so we are told.
But increasingly the things people value are not being captured by GDP. Consider all the free apps and functions on your smartphone. They are not counted in GDP.
We use Google instead of buying maps, prefer Wikipedia to encyclopedias, and listen to streaming music instead of store-bought music. Instead of buying cameras and processing film, we click digital pictures with our phones.
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We no longer buy photo albums, calculators, or for that matter calendars. Facebook, Instagram, and Snapchat are free so they are all excluded from the GDP calculation.
There's more. Consider the move to organic and free-range food. Many consumers choose to buy more expensive alternatives, but that can lower GDP and raise inflation data. A statistician (or Fed official) would claim this is a negative.
"The Economist" article suggests a new measure of GDP would capture production and living standards more accurately. It would measure the changes in the quality of services, such as better healthcare, and would include the benefits of new products.
Whether or not GDP should be changed can be debated, but most would agree that its current growth rate is unacceptably low. In simple terms, when the economic pie is growing slowly or not at all then most companies can grow only at the expense of others.
Incomes have been stagnant for more than a decade, and will remain stagnant until the economy improves. Most believe an acceleration of growth is more likely than a further slowing or recession. We can always hope.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.