ITR Experts Say: How Can We Measure the Success of a Country’s Economy?

by ITR Economics

The ITR Economics speaking team spends a lot of time on the road, and strangers often engage them in that age-old stand-by of small talk, “So, what do you do?”

When we answer that we are economists, most have the good sense to end the conversation. For those that don’t, the follow-up is almost always some variation of, “Well then, how is the economy?”

We typically enjoy the ensuing dialog, likely more so than our now-captive interlocutors. Occasionally, a conversation will take an unexpected turn, as in my recent chat with a cab driver who interrupted my monologue with a pointed question:

“But how do you know? How can you even measure the success of an economy?”

One of the broadest and most commonly discussed measures of an economy is gross domestic product, or GDP. GDP is equivalent to the monetary value of all goods and services produced in a given area – usually a country – and within a certain period of time. It is essentially a measure of all economic activity, or the total output produced by an economy. GDP can be used to gauge a country’s economic health, to make comparisons between different countries, and to measure a population’s standard of living. The standard definition of a recession is two or more consecutive quarters of negative GDP growth. US Real Gross Domestic Product totaled $18.5 trillion in the most recent data release.

When we take a step back and examine the underlying components of GDP, we find that roughly two-thirds of the total is comprised of personal consumption – a measure of consumer spending on goods and services. The remaining third of GDP is divided roughly evenly between government spending and business investment. Business investment includes capital expenditures such as property and equipment purchases and upgrades.

GDP offers a good gauge for the pulse of a country’s overall economy, but it does not always reflect the experiences of individual firms. While many of our clients in the consumer sector find that their businesses correlate closely with GDP due to the sizeable personal-consumption component, other businesses more strongly relate to the industrial side of the economy.

At ITR Economics, we use the US Industrial Production Index as our benchmark indicator for industrial activity. Industrial Production is comprised of data from the manufacturing (76% of total), mining (14%), and utilities (10%) sectors. Contrary to popular sentiment, US manufacturing production is rising and near record-high levels. It accounts for 11.7% of US GDP, but just 8.7% of all workers, as automation makes the existing workforce more productive. The US manufactures a wide array of products, such as chemicals (17% of total manufacturing production), transportation equipment (13%), and food (11%).

Measuring the size of a country’s industrial economy is another way to gauge its success.

In 2019, we expect GDP to expand at a higher rate of growth than Industrial Production. Because no two sectors of the economy move in perfect lock-step, it is important to understand which sector your business is oriented toward, and what to expect from that sector going forward. As an economic consulting firm, we eschew one-size-fits-all answers, and we work with our clients to identify the measures of the economy most relevant to them. We evaluate the relevance of your leading economic indicators and utilize the appropriate benchmarks specifically for your business. Analyzing the appropriate economic data is fundamental to reliable, data-driven decision-making.

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