President’s Corner – GDP

The growth in Gross Domestic Product (GDP) in the first quarter of 2015 was, for lack of a more precise term, lousy. GDP growth was barely above zero. That simply means we consumers did not spend a lot of money during the first three months of the year.

GDP is the dollar value of all finished goods and services produced in a specific time period. It is one of the primary indicators used to gauge the health of a country’s economy. 70% of GDP comes from consumer spending and 30% from government spending. The federal government generally reports GDP as a comparison to the previous quarter or year.

Think of GDP as a measure of the size of the economy. If GDP is calculated based on U.S. dollars, the United States had the largest economy, more than 60% ahead of second place China. In terms of annualized growth in the last three years, we are way behind. The three countries with the highest current real GDP growth are Papua New Guinea, Democratic Republic of the Congo, and Turkmenistan.

Our annual GDP growth rate averaged about 5% from 1947, after World War II ended, until 1989, when the Cold War wound down. From 1990, we’ve been growing at about a 2.5% clip. What happened? Economists give a variety of reasons – changing social attitudes towards consumption, aging workforce, lack of high paying jobs and high student loan debt for college graduates, the widening gap between available jobs and worker skill sets, and technology that eliminates more jobs than it creates.

On the other side of the ledger, savings rates by Americans are at an all-time high. This is great for consumers who need a financial shock absorber against emergencies that inevitably happen to all of us. On the other hand, spending is good for the country which, like many companies including credit unions, must grow to continue to maintain and improve goods and services. Low interest rates in the last six years should have stimulated manufacturing and thus consumption, but it hasn’t. Call it the ultimate dilemma.

What can we do as consumers? The answer is far from simple. It will take an unprecedented alliance of government, schools, publicly-held corporations, financial institutions, and small businesses to devise a singular plan in which all parties work in tandem to bring the U.S. out of our current economic doldrums. Otherwise, we could be facing generations of bumpy financial roads.

David M. Green

(925) 335-3802