As an introductory example to GDP, let's take a general look at how the GDP of the United States has evolved over the past two decades.
The overall trajectory has been one of steady growth with notable exceptions during the global financial crisis and the COVID-19 pandemic.
The global financial crisis, which began in 2007, marked a period of significant economic turmoil resulting in a contraction of GDP.
This downturn was fueled by a combination of factors, including the bursting of the housing bubble, high risk lending practices, and the subsequent collapse of financial institutions.
It led to a severe credit crunch, decreased consumer confidence, and a halt in economic activity, which all contributed to the negative growth observed during this period.
As we moved past the financial crisis, the economy showed resilience and began to grow again.
However, it faced another significant challenge in 2020 with the onset of the COVID-19 pandemic.
This unprecedented health crisis brought about economic disruptions on a global scale.
Lockdowns business closures and supply chain interruptions resulted in a sharp decline in economic activity causing the economy to shrink once more for a limited period of time.
The 2022 GDP could be broken down into the following components.
As shown on the slide, this breakdown nicely underscores the dominance of consumption in the US economy.
It's also important to note the value of imports was higher than the value of exports, positioning the US as a net importer and leading to a trade deficit.
Consequently, the expenditure based GDP is adjusted downward for the United States as it would be overstated otherwise.
In the world of finance, it's not just the size of an economy that matters, but its momentum too.
That's why market practitioners pay close attention to growth rates.
These figures quickly indicate whether an economy is expanding or contracting within a specific quarter.
To conclude to understand the economy's scale, we look at the absolute gross domestic product GDP, but to gauge the health and vigor of the current economic climate, we turn to growth rates.
Consequently, an eagerly anticipated event for investors is the release of the quarterly GDP growth numbers.
These figures reflect the percentage change in GDP from the previous quarter and are commonly expressed as annualized rates.
Take for example, the US quarterly real GDP growth data shown here, The graph details, the quarterly changes highlighting, for instance, that in Q3 of 2023, the real GDP stood at around 22.5 trillion US dollars.
By Q4, this figure rose to around 22.7 trillion, marking a 0.8% growth from the previous quarter, or when extrapolated over a year, approximately a 3.3% annualized increase.
Now, you might notice the term seasonally adjusted rate.
What does that mean? Seasonal adjustment is a method used to iron out predictable seasonal fluctuations in economic activities like the spike in retail sales over the holidays or the agricultural shifts with planting and harvesting seasons.
By filtering out these predictable patterns, the adjusted data offers a truer reflection of economic growth and underlying trends.
How do we achieve this seasonal adjustment? It involves detecting seasonal patterns by analyzing data over many years to separate regular seasonal behavior from other trends and anomalies, applying statistical models to gauge the impact of these seasonal factors on GDP, and removing the identified seasonal effects from the actual GDP data leading to figures that ideally exclude these predictable swings.
This refined data gives a clearer indication of the economy's general trajectory and allows for more accurate comparisons of growth rates between quarters.
Do remember though that when we discuss year over year growth rates, seasonal adjustments aren't needed as the period encompasses the entire seasonal cycle.
It's with the quarter over quarter analysis where this adjustment becomes critical.
