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 gro ...view middle of the document...
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.When the economy is growing faster than the Fed deems to be sustainable, the Federal Reserve is inclined to raise interest rates to slow the rate of growth and prevent inflation from accelerating. A quickly growing economy can lead to rapidly rising wages and salaries, which increases the cost of goods and, therefore, leads to inflation.REFERENCES:BEA, U.S. Department of Commerce, National Economics Accounts "News Release: Gross Domestic Product, Third Quarter 2004" October 29, 2004, Volume BEA 04-48.
