The U.S. Bureau of Economic Analysis recently reported that the economy grew by 1.6% in the March quarter, falling short of growth expectations that ranged from 2.1% to 2.7%. It is important to note that one should not read too much into any single quarter’s GDP growth rate, as these calculations are based on quarter-to-quarter comparisons. The four key components of the United States economy include Personal Consumption, Gross Private Domestic Investment, Net Exports of Goods and Services, and Government Spending, with Personal Consumption being the most important segment at 69% of the total economy.
Gross Private Domestic Investment is the second most important segment at approximately 18% of the economy and provides insight into how company CEOs view the economic outlook. Changes in inventory levels within Gross Private Domestic Investment can significantly impact economic growth, as seen in the March quarter where it subtracted 0.35% from the total growth rate. Net Exports of Goods and Services, while important for the economy, can have a highly variable impact in any given quarter, subtracting 0.86% in the March 2024 quarter. Government spending, on the other hand, is not necessarily indicative of the economy’s underlying strength or weakness, contributing 0.21% in the March quarter but 0.82% a year ago.
A better method to assess the strength or weakness of the economy is to eliminate the impacts of inventory changes and government spending. This calculation involves using Personal Consumption, Gross Private Domestic Investment without inventory impacts, and adding Net Exports of Goods and Services. When examining the economy’s performance since the beginning of the Covid pandemic and its recovery, there has only been one quarter of decline following the initial shutdown – the March 2022 quarter.
Another calculation method involves removing the Net Exports component along with inventory changes and government spending, as it is partially dependent on non-U.S. economies. With the exception of a weak period in the second half of 2022 when the Federal Reserve was raising interest rates, the economy has been growing steadily. Both calculations provide a comprehensive picture of the economy’s performance, allowing for a more nuanced understanding of its strengths and weaknesses.
