Gross Domestic Product, or GDP, is a measure of a country’s economic output. The GDP growth rate measures how fast the economy is growing by comparing one quarter’s GDP to the previous quarter.
Gross Domestic Product (GDP)
While GDP is commonly discussed in the news, its components are rarely explained:
In 2018, 68% of U.S. GDP came from personal consumption, or goods and services. Goods (21% of GDP) are either long-lasting items, like computers, jewelry, and cars; or consumables, like groceries, clothing, and fuel. Services (47% of GDP) are intangible products, such as plane tickets, legal advice, and tuition payments.
Roughly 18% of U.S. GDP is driven by purchases from businesses that invest in everything from factory equipment to software to inventory. New construction of office buildings and residential homes is also categorized as an investment for the purpose of calculating GDP.
17% of U.S. GDP comes from spending by the government at both the federal (5-10%) and state (about 10-15%) levels. National defense spending is about 4% of GDP, and the remaining funds go toward things like schools, roads, and infrastructure.
Since we purchase more than we sell, known as a trade deficit, net exports are negative, hovering around -3%, and decrease U.S. GDP. It represents the amount of goods we sell to other countries minus the amount we purchase from them.
This is a driving force behind GDP growth. Since personal consumption makes up 68% of GDP, a growing population that works and consumes is an important determinant. As the U.S. population ages, there are fewer workers and lower consumption by these individuals, which could hurt economic growth. While not as favorable as they once were, the latest data suggests that the U.S. is in a comfortable spot with respect to its population growth (see graphs above.) Ideally, the population looks like a pyramid with more young generations than old ones. However, a pillar-like shape, like the U.S. has today, shows that the number of births is slightly outpacing the number of deaths, which is most important. In contrast, countries like China and Japan have bulging, or mushroom-shaped, demographic profiles, demonstrating declining birthrates and an aging population.
Innovation, measured by productivity:
This is another key driver of GDP growth and Economists estimate that approximately 50% of U.S. annual GDP growth is attributed to increases in this productivity.2 The U.S. has a long history of bringing to market impactful inventions that have spurred economic growth. Dental floss, hearing aids, and cardiac defibrillators are examples of necessary products that improve lives. More recent inventions like the computer, email, and the internet have been incredible drivers of economic growth and created entirely new markets. Technologies like 5G may lead to even more innovation, such as autonomous cars and breakthroughs in how Americans experience healthcare.
Wrapping It Up
As long as the U.S. continues to have favorable demographics and an entrepreneurial spirit, the economy is likely to grow and the GDP growth rate will stay positive. A solid economy is the backbone of the stock market. For more information about this, please reach out to one of our team members.
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