Gross domestic product (GDP) is generally considered the best indicator of the economy’s health as a whole. It’s often referred to as the “temperature of the economy.” GDP is critical information for investors in all asset classes – including real estate. The goal of this article to empower you so that when you hear news about the GDP, you understand what the number represents regarding the trajectory and basic health of the economy and how that might affect your clients’ real estate decisions.
GDP is an aggregate measure of the value of all goods and services that are produced in the U.S. economy. It is reported in real money terms and adjusted for inflation. Usually, GDP is reported relative to the previous quarter. For example, the Bureau of Economic Analysis reported that the annualized rate for the third quarter of 2014 was 3.5 percent. This means that if the economy keeps growing at its current rate, in one year, the economy will have grown by 3.5 percent. This is solid economic growth. As additional information becomes available, the BEA revises its GDP calculation, so this figure could change.
How is GDP Calculated?
There are four components of GDP:
1. Consumption. Consumer purchasing is the biggest contributor to GDP. Housing-related products and services are included in this category.
2. Investment. New home sales and broker commissions are part of the investment component.
3. Government spending. Measured for both federal and state level.
4. Net exports. Total exports minus total imports equals net exports. This number is usually negative because the United States tends to import more goods than it exports.
If GDP is rising, the economy is improving. If GDP is not moving or falling, the economy is getting worse. This is why GDP is referred to as the economy’s temperature. While it doesn’t provide a detailed diagnosis, it does provide direction.
GPD is important to understand because it has a big impact on practically everyone within the economy. For example, when the economy is healthy (represented by GDP between 4-6 percent), we normally see lower unemployment rates as labor demand increases to meet the growing economy. A negative GDP growth rate can forecast a recession. You should watch for steady growth or recession (which is defined as two consecutive quarters of negative growth). GDP should be evaluated by looking at the trend over time, not just the most recently reported figure.
This is the last post in the Q3-2014 Market aha series. We encourage you to read the entire series and collectively use all of the information to better assist your clients with their important real estate decisions.
Don’t forget to check back in January, 2015 for the Q4-2014 series.