GDP AND REAL IMPORT

Relationship between Real GDP And Real Import

Relationship Between Real GDP And Real Import

The best measure of the economy's health is the real growth rate (growth in excess of inflation) of the Gross Domestic Product (GDP). A recession is considered to be a period when GDP growth is negative for two consecutive quarters. The country's Real Gross Domestic Product is the sum of the output of goods and services that are located in the United States. GDP is a measure of total spending in three categories (consumer spending, business spending, and government purchases), and is adjusted for net exports. Net exports is negative because the United States imports far more than it exports. Consumption (consumer spending) is the most import component and comprises approximately 68 percent of GDP.

The annual real GDP growth rate is determined by measuring the quarterly growth rate, and assuming that rate continues for a full year. Preliminary estimates are released one month and two months after quarter end, and the final revision is released almost three months after quarter end.

The rate of GDP growth is very important to the housing market, not only because it measures the strength of the economy, but also because the variance from what is considered to be the long-term achievable growth rate influences Federal Reserve policy, which directly affects mortgage rates. When the economy is fully employed (generally considered to be when the unemployment rate is around 5.0%, real GDP growth of 2.5% has traditionally been considered to be the long-term achievable growth rate. This range is determined by adding the historical population growth of 1.0% and the historical productivity improvement of 1.5%. Recent technological advancements, however, have led to significant improved productivity, which in turn has led Federal Reserve Chairman Greenspan and others to conclude that 3.0% to 3.5% may be the new long-term sustainable growth rate. (BEA)

The Federal Reserve controls the discount rate (the rate at which banks borrow from the Fed) and the Fed Funds rate (the rate at which banks borrow from each other). These rates have a "trickle down" effect on economic growth (GDP) because higher bank costs lead to higher borrowing costs for consumers and companies, which in turn slows spending. Additionally, a trickle down effect occurs on mortgage rates because banks must raise mortgage rates to cover their costs. Higher mortgage rates eventually dampen housing demand, which eventually reduces economic growth.

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