No one likes misleading advertising, and it comes up more than it should. Your nonstick pans stick, your knife set can’t cut through a penny, and gross domestic product (GDP) isn’t a good indicator of economic health. You read that correctly. The world’s most popular measure of economic health has an element of snake oil to it.
I wouldn’t go as far as saying GDP is a scam. But I think it’s held out to be a far superior gauge of economic prosperity than it truly is. I don’t want to turn you off from it completely, but I would like to share some often-neglected context and make the case that we should take GDP with a grain of salt, at the very least.
Growth wasn’t always a major consideration when discussing GDP. It was originally used to address sector imbalances and economic instability, but that changed when WWII came around. Suddenly caught in a war that would require the production and use of more resources, the question shifted from “How do we maintain economic stability?” to “How do we maximize economic growth?” Even after the war passed, the focus on growth had already established itself and largely sticks with us today. But when does growth stop being the answer?
We live on a finite planet with finite resources and a declining birth rate. Those details certainly seem to be at odds with a goal of constant growth. While there is immense promise in the renewable resource space, the future is far from certain and we’re already seeing the effects of overuse. That begs the question as to whether constant growth is realistic and whether the potentially unsustainable goal of GDP growth should play such a large role in our economic planning.
Wouldn’t you be upset if you worked your butt off for hours each day, over the course of many years, just to find out that none of it was taken into consideration by the “most comprehensive measure of economic health”? Well, shout out to all the stay-at-home parents who must cope with that thought. From cooking and cleaning to childcare and transportation services, stay-at-home parents are constantly working to help their families operate smoothly. Yet GDP disregards the value of these efforts despite their contributions to the economy. To that, I might say, “Let’s see how healthy the economy is if all the stay-at-home parents stop working!” Now, I’m certainly not advocating for child neglect just to spite an economic indicator, but you get my point.
This dynamic extends beyond parenting and touches areas such as eldercare, volunteer work, unregulated markets, and the less savory black markets. All these areas involve the exchange of time or money for a product or service, yet GDP is blind to them. While it does make sense that these activities aren’t included in GDP due to the lack of formal reporting, we can be understanding of the omissions while keeping them front of mind when scrutinizing GDP as a measure of economic health.
My biggest beef with GDP as a measure of economic health is that it doesn’t really have anything to do with health. Wasteful spending could increase, the wealth gap could widen, average levels of physical health could decline, and the quality of education could deteriorate without any direct negative impacts on GDP. That leads me to question what we consider a “prospering” economy. Even the creator of GDP, Simon Kuznets, offered early warnings to Congress that “the welfare of a nation can scarcely be inferred from a measure of national income.” Especially with the context of the widening wealth gap in recent decades, where wealthier individuals are representing a larger portion of the overall economy as time goes on, it is easy to see that a strong GDP print doesn’t necessarily mean the economy is healthy.
To be clear, I don’t think we should kick GDP to the curb and avoid using it due to its limitations. If that were the precedent for using economic indicators, then we would scarcely rely on any of them. Instead, I’m simply suggesting that we revisit how we speak and think about GDP, acknowledge what it is measuring, and avoid the urge to summarize the health of our economy through a single number.
To illustrate my point with some real-life examples, let’s start by looking at the first half of 2022. The U.S. saw two consecutive quarters of negative GDP growth—a popular rule of thumb that points to recession. Thinking back to how everything played out, did those days look or feel anything like a recession? No! Unemployment was at historic lows like today, industrial production remained strong, and consumers felt secure enough to keep spending their money.
Fast-forward to where we stand today, and headlines are telling us to “say goodbye to recession talks” after the most recent GDP reading showed strength and beat expectations. While I think the economy is doing very well, I’m certainly not going to use GDP as my only reason to back away from the recession watch given the remaining presence of real risks to the economy. Consumers’ debt levels are rising as their excess savings dwindle, and there are evident concerns about how the residential and commercial real estate markets will play out, just to name a few. While a recession certainly isn’t my base case in the immediate future, as overall signals offer real reasons for hope, it’s always worth keeping an eye on the dangers that lurk.
All in all, the moral of the story is to take GDP with a grain of salt. When it points to weakness, don’t panic too quickly. When it points to strength, don’t rejoice too quickly. Remember what GDP measures, what it doesn’t measure, and that it is a single piece in a vast puzzle the economy lays out for us.