Michael Lebowitz

GDP - Even Less Than Meets the Eye

Domestic economic output or GDP is well correlated with corporate profitability which in turn is the backbone of corporate stock and bond valuations. Disturbing economic data and trends may be ignored by the markets for the time being, but as an investor, you should have a deep understanding of economic growth trends as they ultimately dictate price.

 

" GDP - Even Less Than Meets the Eye " evaluates GDP from a different perspective. Economic growth has been weak since the so-called recovery began following the financial crisis. GDP on a per capita basis is even more grim and sheds additional light on the economy that is rarely discussed by those in the government and media touting economic resiliency.

 


mplebow@720global.com
301.466.1204
GDP
–
Even less than meets the eye
The most common statistic
used
to measure the size and growth
rate
of a nation’s economy is
Gross Domestic Product (GDP).
However,
GDP as most commonly used
can be
a
flawed
measurement
if one
tries
to infer that the size or growth of economic activity is well correlated
to the prosperity of its people.
C
onsider China and the United States
for example
. The U.S. has a
GDP of ap
proximately $16.5 trillion and a population of
roughly 325 million
while
China has a
GDP of nearly $11 trillion
and a
population of approximately 1.4
billion
. One could
say that
China’s economy is about two
-
thirds the size of the U.S.
economy
, however when
one considers
how that activity is spread amongst the citizens, China’s economy is only
one
-
seventh that
of
the
U.S
.
Accordingly, Chinese citizens are
clearly less productive and prosperous
than U.S. c
itizens
GDP per capita
(per citizen)
,
as demonstrated above
,
is a valid way to measure the efficiency of
one nation’s
economic output
versus another and
is
also an important statistic to gauge the
productivity
and prosperity trends in one country.
We have frequently
shown
the
declining
trend
in secular GDP growth
in charts like those shown below
.
1
-
year Average GDP Growth
(Currently below levels preceding every recession)
3
-
year Average GDP Growth Trend
(Consistently trending lower)
Data Courtesy: St. Louis Federal Reserve (FRED)
Data
Courtesy: St. Louis Federal Reserve (FRED)
mplebow@720global.com
301.466.1204
Above,
GDP
is plotted
on an
absolute
basis and do
es
not take into account the amount of
economic activity or economic growth per person.
Below, we show
the ten
-
year growth rate of
GDP per capita
.
Ten
-
Year
GDP Growth Rate Per Capita
Data Courtesy: St. Louis Federal Reserve (FRED)
and U.S. Census Bureau
As one easily
notices
GDP on a per capita basis is more
worrisome
than when viewed on a total
basis as in the first two graphs
.
The
e
conomic growth
rate
per person
is
currently
below one half
of one percent. More concerning
,
it
is below levels
seen during
the g
reat financial crisis
in 2008
and
it
is still trending lower.
T
his graph confirm
s
our macroeconomic concerns
and
helps
explain, in part,
why
so
many
U.S.
citizens
fee
l like they
are being left behind.
Factor in that many of the economic spoils are not
evenly distributed
,
as assumed in this analysis
,
but are largely accruing to the wealthy
, and the
problem only worsens
. As such, t
he growing social anxiety and trend towards populism, be it
conservative or liberal leaning, will
not likely dissipate if
the
aforementioned economic
trends
continue.
0.46%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
10
-
Year Avg. GDP Growth Rate
mplebow@720global.com
301.466.1204
720 Gl
obal is an investment consultant, specializing in macroeconomic research, valuations, asset
allocation, and risk management. Our objective is to provide professional investment managers
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