What is GDP?
As the Federal Reserve fights to cool inflation, all eyes are on GDP growth as a key determinant as to whether or not the economy is overheating. You may ask yourself, what is GDP?
GDP or gross domestic production (GDP) is a calculation designed to determine whether or not the economy is growing or shrinking. It shows the health of the overall economy and is one of the factors that impacts inflation, a major focus of the Federal Reserve right now.
GDP basically measure the economic growth of an economy. It is a number measuring the output of all goods and services produced by an economy.
Why is GDP tracked so closely? An excerpt from this article stated:
“Why does the US government track GDP?
Tracking GDP allows policy makers, journalists, and researchers to understand how quickly the economy is growing or shrinking. It is used across government entities for planning purposes, including preparing federal budgets, setting monetary policy, and guiding economic research. For example, the White House uses GDP growth to generate tax revenue projections, which are then used to craft budget proposals.
In the private sector, GDP is a key measure used by a variety of professionals, including financial experts to make investments and CEOs to guide their long-term strategic planning “
GDP growth has been quite strong over the course of the last year as the economy continues to bounce back from the pandemic. Only lately has GDP began to be impacted by higher interest rates; expect this to be the case in the near future. Growing inflation is usually a sign the gross domestic product is strong.
When GDP contracts it may be one of the warning signs that a recession may be eminent. We think it’s one of the reasons why the bond market has rallied so significantly. The bond market is expecting there will be a significant GDP downturn or recession. The equity market is clinging to the belief that we will see a shallow recession or a soft landing. In other words, bullish investors expect GDP will slow but not to the point that we dip into a recession.
It is our view that the odds of a shallow recession are greater than 50% and the odds of a soft landing are less than 20%. We assess daily information and modify our view as needed.
As you digest news reports from the financial press, remember that GDP really sets the stage for future action by the Federal Reserve. It’s a data point we watch quite closely, and it does impact how we invest portfolios.