How is the GDP growing when nothing else seems to be?

Question

We've had strong GDP growth all three quarters this year. To me, that would indicate that, in at least some areas, we should be seeing growth. However, from my extremely ignorant armchair, it doesn't look like that's happening.

Wage growth has held steady, the DOW, S&P 500, and NASDAQ are all roughly even year-to-date, and the deficit has grown 17%. Even the trade deficit is growing. This confuses me. Though not perfectly correlated, I thought the GDP would at least be a strong indicator of these other financial components (or the other way around).

To grossly (pun unintended) oversimplify my point: it sounds to me like the value of America has gone up, but there's somehow less money in America.

Am I missing something? How can the GDP be consistently growing at a rapid rate when nothing else seems to be?

Answer 1

There's a bit to unpack here.

Consistent wage growth seems in line with rising GDP. So does a steadily falling unemployment rate.

For other economic measures, the stock market is a whole other animal. It often responds to outside global events that aren't solely economic in nature. It may also be affected by the Federal Reserve's desire to steadily increase the interest rate, though we would expect that to also affect unemployment somewhat perhaps.

The most interesting point of contention here is the trade deficit. It's a common misconception that high trade deficits should imply slower GDP growth. During the Great Depression we ran a trade surplus. During 2001 and 2009, with some of the weakest GDP growth, we also had small trade deficits. One possibility as to why we are running a trade deficit is that with a booming US economy, domestic production demands more inputs, which we have to get from abroad for at least a little bit.

It's not really a matter of "less money in the economy" at the end of the day. You can also consider the typical textbook expression for calculating GDP:

$Y = C + I + G + (X - M)$

Where $Y$ is in GDP and $(X - M)$ is exports minus imports. From this equation, it looks like the more we import, the lower GDP gets, so if we end up running a trade deficit because imports keep rising or "money leaves the economy", then we should have smaller GDP.

What's easy to forget is that we have to do something with these imports. We either consume them, use them for investments, or the government buys them ($C, I, G$), so subtracting imports from the measure of GDP is just a way of preventing double counting.

Answer 2

This is an excellent question you ask. Another way this could have been asked is how can the economy grow by roughly one-third in real dollars while real median household income drops like a rock?

So, based on Gross Domestic Product (GDP), the U.S. economy has grown since 2000. GDP rose from 10,002 in 2000 to 17,974 in mid-2015. That's an increase of roughly about 77.8%.

If we adjust GDP for inflation, we get what's known as real GDP, which increased roughly about 34.6%: from 12,924 in 2000 to 17,397 in mid-2015. This works out to a real annual increase of about 2.9% annually.

It would be natural to expect full-time employees' wages and salaries to rise at about this same rate as the economy expanded. But real median weekly earnings (wages and salaries) increased a grand total of $5 dollars in the past 15 years: from $334 per week to $339 per week.

If wages and salaries had risen at the same 2.9% annual rate of real GDP growth, median weekly earnings would be $479, not $339. That's $140 more per week. But weekly median earnings for full-time workers rose only $5 per week, not $140 per week.

In other words, the growth in real GDP hasn't trickled down to wages and salaries.

Real household income--which includes both earned income and unearned income such as dividends and interest--has plummeted 7.8% since 2000. This is a striking contrast with real GDP growth of 34.6%: the economy has expanded 34.6% after adjusting for inflation, while real median household income has declined 7.8%.

If real median household income had grown at the same 2.9% annual rate of GDP, it would now be $86,000 a year rather than $55,600.

So where did all this growth of the economy end up?** How can the economy grow by roughly one-third in real dollars while real median household income drops like a rock and real wages/salaries are essentially unchanged for 15 years?

You can check these projections based on 2.9% annual growth for yourself with a simple Excel spreadsheet.