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GDP Math

06/30/2022

Wall Street economists pay close attention to the growth rate of our Gross Domestic Product.  For the first quarter (Q1) of this year, GDP growth was estimated at a negative 1.2%, which was the first quarter to shrink since the pandemic collapse two years ago.  On the second reading, we found GDP shrank 1.5% instead.  Yesterday’s final reading was a negative 1.6%.  The commonplace definition of a recession is two consecutive quarters of shrinking GDP.  One down, but what about this quarter (Q2)?

Economists agree that the computation to determine our Gross Domestic Product (GDP) is the sum of Consumption Spending (C) plus Investment Spending (I – think factories, not Wall Street) plus Government Spending (G) plus the net of export/imports (E).  The formula is GDP = C + I + G +/- E.

Economists argue whether C is 65% or 70% of GDP . . . call it 67%.  That simply means it is the single most important determinant of GDP, but what drives C or Consumer Spending?  Consumer confidence and consumer sentiment, that’s what!  Consumer confidence dropped to 98.7 in June, the lowest in 15 months.  Consumer sentiment dropped to a new all-time low.

(Consumer confidence largely reflects attitudes toward the job market, while consumer sentiment reflects attitudes toward current economic conditions.)

It can easily be assumed that Q2 growth will also be negative, and we can consider ourselves in a recession already.  The question becomes how serious will the recession be and how long will it last.

My expectation is that it will be relatively weak and short!

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