Though not the only measure of a nation’s economy, the measurement of GDP (Gross Domestic Product) is usually the benchmark used for most financial and economic reporting.
Put simply, GDP is the sum of four things; consumer spending, government spending, business investment and exports/imports. When measuring the increase or decrease of GDP, the increase or decrease of the four components are added together to come up with the U.S. GDP. GDP is calculated quarterly and is then is annualized as a percentage. For example, in the last quarter of 2014, the GDP for the U.S. was reported as 2.6% (on an annualized basis), because the GDP for all of 2014 was 2.4%
The Wall Street Journal surveys a group of nearly 50 economists for 2015, shows an average GDP growth of 3.0% for each of the first three quarters and 2.9% for the fourth quarter. Note that the figures for each quarter are annualized for a year. Annualized GDP would be .75% or three-quarters of one percent for each of the first three quarters of 2015 with the last quarter of 2015 being .725% for a total of 2.975% GDP growth for the year – usually rounded up. In this case to 3.0%.
The Amateur Economist believes these numbers are too optimistic. So why will the 2015 GDP growth be lower than expected? For three main reasons:
- Consumer spending will not rise as much as forecast,
- Business investment will decrease as the result of lower oil and gas investment
- Exports will decrease and imports will increase (in nominal dollar amounts) as the result of a rising dollar value.
Let’s take a brief look at all three items.
First, since consumer spending is about 2/3rds of the nations GDP, increases or decreases in spending by consumers can have a large impact on GDP. Most economists are predicting that with lower gasoline prices and a happier “outlook” on their future, consumers will open up their pocketbooks and spend, spend, spend. However, evidence shows that consumers have not spent their gasoline savings, but instead paid down debt or saved the money. Last week, it was reported by the Commerce Department that consumer spending actually fell 0.3 percent after gaining 0.5 percent in November and 0.3 percent in October. Additionally, with poor weather in January and possibly February, consumer spending will probably stay relatively flat.
Secondly, business investment represents another 16% of the U.S. GDP. Business investment includes purchases that companies make to produce consumer goods. However, not every purchase is counted. If a purchase only replaces an existing item, then it doesn’t add to GDP. Components include capital goods, machinery, airplanes, software and real estate (new construction only of both commercial and residential.) A large part of the nation’s business investment over the last several years has been attributed to the oil and gas industry. This investment is expected to drop substantially (30-50%) for 2015 due to lower oil prices.
Lastly, the net change between U.S. imports and exports is also counted in the calculation of U.S. GDP. And with the rising dollar, exports are expected to decrease (American goods are more expensive overseas) and imports will increase (imports are cheaper in the U.S.) In addition, with the rest of the world either economically stagnant or showing signs of slowing, American manufacturing will decrease as not only will the goods and services not be as needed, they will be more expensive (rising dollar) – not a good combination.
Given these factors (and the lack of any real government growth – the fourth pillar of GDP) expect GDP to be in the 1.0-2.0% range for the first few quarters (with maybe one quarter showing negative growth) and a very weak fourth quarter. So for 2015, the U.S. will have a very weak GDP year.