The third quarter of 2024 showcased a 2.78% real GDP growth rate, driven heavily by consumer spending and defense expenditures. On the surface, this might seem like a sign of economic strength and stability. However, historical data suggests that GDP often misleads us into believing that the economy is more stable than it actually is. In fact, just before almost every modern recession, GDP figures appeared solid, only to be followed by economic downturns. Let’s examine why GDP may be an unreliable indicator for forecasting recessions and consider past cases to understand how current economic growth could be setting us up for a downturn.
GDP and Its Backward-Looking Nature
GDP primarily provides a snapshot of what has already happened in an economy, summarizing the total output across sectors without detailing how sustainable that output is. High GDP growth might mask underlying economic fragilities, particularly when bolstered by artificial or unsustainable drivers like defense spending, which in Q3 2024 alone contributed nearly 0.5% to the headline GDP. This heavy reliance on government expenditure, especially defense, is far from an organic indicator of robust private-sector growth.
Historically, economists have argued that GDP fails to forecast future growth accurately because it measures past
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Good stuff, Jarrid! Thank you!