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Thursday, June 21, 2012

What is GDP?

Yesterday the Fed, amid considerable ballyhoo, held a two-day Federal Open Market Committee meeting at which they announced a six-month continuation of "operation twist" and produced economic forecasts by senior members of the Committee.

Among the forecasts, indeed as would be the case of  anyone talking about the macroeconomy, was GDP.  They ratcheted down the forecast for the 2012 range for GDP growth from 2.4% - 2.9% predicted in April to 1.9% - 2.4% today.  They moved down, as well, their forecast for 2013 from an April range of 2.7% -3.1%  to 2.2% - 2.8%.

The bottom line is they see a weakish macroeconomy thru the end of 2013.  Fed Chairman Bernanke stated in his follow-up press conference that he was poised to take additional measures (read "another quantitative easing") if the employment situation doesn't improve.  Well, if the economy performs in line with the forecasts, the employment situation isn't going to get any better.

What is GDP?

GDP stands for Gross Domestic Product.  Formally it is defined as the market value of all final goods and services produced within the economy over a specified period of time.  It is reported quarterly and the primary focus is the annual rate, corrected for inflation, i.e., so-called "real GDP."

GDP is comprised of four broad components:  C (consumption), I (investment, G (government), and NX (net exports).  Some points to keep in mind:  consumption comprises a bit more than 2/3s (hence, the ongoing national angst on household spending), investment is the most volatile as inventories and housing swing around, government has grown recently due to the aggressive fiscal policy stance of recent years, and NX has, for some time, been negative, reflecting the fact that we buy much more from the rest of the world than it buys from us.

To find the latest GDP report go to  There you will find that GDP is at $15.45 trillion. As a matter of perspective, 1 trillion is 1,000 billion and 1 billion seconds is 31 years. Thus, if you are less than 31 years old, then you haven't been alive 1 billion seconds.  The point is that $15 trillion is a big number!

Another way to think of GDP is that it is essentially what it would cost to buy all the goods and services produced in the U.S. over the past 12 months.  Yet another way is to think of it metaphorically as a pie.  Then the objective of monetary policy (and fiscal policy, for that matter - but that's another can of worms) and the Fed can be stated simply as grow the pie and put people to work without setting off inflationary pressures.

Markets are now questioning whether the Fed has sufficient tools to overcome a possibly weakening employment situation.  Stay tuned.

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