What the heck is GDP?

Today, the Commerce Department released its report on the second quarter (Apr-Jun) gross domestic product. According to their numbers, the US economy contracted at a 1% clip (on an annual basis). In the first quarter, GDP contracted at 6.4%. A big improvement? Hmm, let's get past the headline. First and foremost, what is gross domestic product and can I buy it in my local supermarket.

GDP is one of the more widely measured and monitored calculations around the world. It measures the final value of goods and services produced by a country in a year. For you formula geeks, its private consumption + investment + government spending + (export-import). Now for you fans of my blog, you'll remember that consumer spending (consumption) makes up 2/3rds of the economy. Well for Q2, consumer spending fell by1.2%. With that fall, where was the improvement in the rest of the formula? Investment which measures what businesses buy for equipment and other investment in the business fell by 8.9%. Investment also measures what you and I do with buying a new or existing home fell by (yikes) 29.3%. Now, exports fell only by 7% (vs. 29% last quarter). The culprit there? That is the falling dollar making our goods cheaper for foreign buyers.

If I haven't bored you to death yet, the coup de grace, government spending was the stalwart in the quarter. Yes, our beloved government spending its stimulus money to prop up the economy. Some would say that if they didn't intervene we could be looking at a really bad quarter. I say that if the stimulus had more infrastructure spending and more of it spent in this year vs. next, we could be looking ok. We can argue about the spending in that stimulus program another time as there are many stories of waste as we speak (NEA - porn spending).

The government spending appears to have masked a really bad economy and a falling US dollar. While the headline would have you believe that the GDP result as better than expected, look deeper folks. Look deeper into any headline you read now. The spin doctors are out in force these days, making bad news look like honey. Have a good weekend! Cheers.