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What really is the “Economy?” Thumbnail

What really is the “Economy?”

The news is always talking about the “economy” and GDP.  But what really is the economy and GDP?  How is the economy measured?   

Allow me to attempt a “Reader’s Digest” discussion of the makeup of the economy.  The health of our economy is measured by the calculation of a country's GDP which stands for Gross Domestic Product.  This is measured by the Bureau of Economic Analysis and is divided into four components.: (1) 

  1. Private Consumption --- ie consumer spending….you and me. 
  2. Fixed Investment --- business spending on new property, plants and equipment. 
  3. Government spending
  4. Net exports.

In 2019, consumer spending made up  approximately 70% of the economy.  Yes, believe it or not, what you and I spend every day is by far the biggest driver of our economy.  This is further broken down into three categories:  non-durable goods like food, fuel and clothes; durable goods like cars, furniture and large appliances; and finally, services.  Services include banking, education and health care.  Because of the huge cost of health care, services are 45% of consumer spending. (1) 

Fixed investment is spending by businesses to increase their ability to make more money.  In other words, money spent to replace worn out equipment does not add to spending.  This is money spent to build new factories, buy land for expansion and new equipment for that new factory.  In 2019, this represented 18% of the U.S. GDP. (1) 

Often this is referred to as “durable goods orders” and is an indication of companies expanding their business to make more products and is a good sign for future economic growth.   

Government spending in 2019 was $3.3T or 17% of GDP.  State and local governments spent $2T and the Federal government spent the remaining $1.3T.  Sixty percent of the Federal spending went to the military. (1) 

During the booming economic time prior to the Recession of 2008, government spending, as percentage of GDP, was 19%.  It is often thought that government spending is wasteful and therefore a bad thing.  Unfortunately, it is really not that simple. 

A popular topic is “infrastructure projects.”  These are spending projects by the government to build roads, bridges, port facilities, schools, hospitals, etc.  These are investments in the future efficiency and profitability of the country in addition to providing jobs and therefore tax revenue now.  The “stimulus” package being discussed by the President and Congress is thought by some to be a “give-away” of money financed by borrowing.  The alternative is millions of adults and children without homes or food that need to be cared for by social service organizations who ultimately get much of their funding from the government.  A stimulus that goes direct to the consumer may well be more efficient and will in turn stimulate the economy as those “consumers” spend the money.  The folks receiving stimulus money spend it almost immediately and therefore have direct and immediately positive impact on the economy. 

Net exports is the total value of goods and services that domestic producers sell to foreign countries minus the total value of foreign goods and services that domestic consumers buy. When the U.S. sells more to foreign countries than it buys, then we have a trade surplus.  This adds to the GDP.  If the opposite situation occurs and the amount that domestic consumers spend on foreign products is greater than the total sum of what domestic producers are able to sell to foreign consumers, we have a trade deficit and the GDP decreases.  In 2019, our trade deficit decreased our GDP 5%. (1) This is a much bigger topic for another day. 

It is hard to get a measure on the current economy.  Second quarter with the onset of COVID was down roughly 30+% and the third quarter revised upward of about 33%.  On the negative side, the number of people filing for first-time unemployment are rising and the growth of new jobs is declining.  Congress and the President still do not have a stimulus plan.  Eviction moratoriums are expiring.  Hospitals are at capacity in many places in the country. The lines at food banks are increasing.  On the positive side, the first vaccines were shipped a few days ago.  The economy was strong before the pandemic and will in all likelihood return strong.  The question is when? 

The stock market is at record levels.  Why?  Many companies are showing record profits.  The markets are pricing in the strength of the economy after COVID.  The stock market is a “leading indicator” of economic activity and often goes up prior to the economy beginning to look better.  Please call me if you have questions. 

Enjoy your holidays as best you can during this very different and challenging Hanukkah / Christmas.  We all have things we can complain about and wish were different.  Yet, I am grateful for so very much.  Bad stuff has happened to many of us and those we love and care about.  If you are able, focus on your blessings, share with those in need, and help the organizations that help those that need a place to sleep and a hot meal.  My local suggestion is Interfaith Community Services. https://www.interfaithservices.org/who-we-serve/ 

  1. https://www.thebalance.com/components-of-gdp-explanation-formula-and-chart-3306015 
  2. https://www.bea.gov/news/2020/gross-domestic-product-3rd-quarter-2020-second-estimate-corporate-profits-3rd-quarter 

Entertainment Options : 

  • Murder on Middle Beach..... Four Part Documentary , Filmmaker tries to solve his mother's murder near her home in 2010... HBO and HBO Max
  • Sound of Metal..... An evocative look at the experiences of the deaf community and music ....Amazon Prime Video

A goal without a plan is just a wish.”  -- Antoine de Saint-Exupery        

Fred Wollman, CFP®, MPAS®, AIF®        

144 South Grape St        

Escondido, CA  92025        

Phone 760.737.2246; 800.354.4568        

Fax     760.745.1239    fwollman@voyafa.com        


Investment Advisor Representative and Registered Representative of, and Securities and Investment advisory services offered through Voya Financial Advisors, Inc. (member SIPC)                

The views and opinions expressed are those of the author, and the information should not be construed as individual investment advice, or as the opinion(s) of Voya Financial Advisors. CN1449773_1221