Gross Domestic Product
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Gross domestic product (GDP) is defined as the total market value of all the goods and services produced within the borders of a nation each year. Gross domestic product includes all goods and services produced by either citizen-supplied or foreign-supplied resources employed within the country. GDP is a monetary measure to compare the relative values of the vast number of goods and services produced in different years. GDP can be viewed from an expenditures approach as the sum of all the money spent in buying the product or service. Real GDP is that which has been inflated or deflated to reflect changes in the price level. GDP can also be viewed as the income approach, which is the income, derived or created from producing the product or service. GDP through 2009 has been forecasted at 3.7%, 3.4%, and 3.1%, a small decrease (www.cbo.gov). If accurate, this data proves a huge increase since 2001 when GDP was 2.2%, 2002 at 1.3%, and 2003 at 2.5% (www.cbo.gov). Adversely, the Mortgage Bankers Association predicts strong economic growth over the next two years with GDP at 4.1% through 2007. Economists at Comerica Bank in Michigan also have the same forecast prediction for GDP in the upcoming years of 4% (www.comerica.com).
In the Comerica forecast, the predicted path of unemployment rates will gradually decline over the next few years. The current rate is 5.4 to 5.1 in 2007. In recent years, unemployment rates have been declining from 6.0 in 2003. With unemployment rates holding steady over the next few years, spending will continue to increase in areas of buying homes and investing.
Housing starts reached the highest level in two decades during the first quarter of 2005. The main reason for this increase has been steady interest rates (Haughey, 2005). Looking forward, a number of challenges face the housing construction market including commercial space, potential rising interest rates, and reduced tax revenues eventually impacting public works and institutional buildings. Adversely, the Mortgage Bankers Association has forecasted existing home sales decreasing to 3.5% in 2005 and no change through 2006. New home predictions are the same, with a decrease in 2005 and stagnant growth through 2006. Price increases for the new homes will average 4%. Economists from the Anderson Forecast also predict a decrease in the percentage of housing construction through the next 3 years and go as far as to say a possible recession of the economy in 2006 or 2007 (Calbreath, 2005). Jim Haughey, Director of Economics for Construction Equipment magazine forecasts housing starts to decrease from 2.16 million in January 2005 down to 1.8 million starts by late next year (Haughey, 2005). Christopher Thornberg, Senior Economist at Anderson Forecast noted that the housing boom over the past several years has helped boost consumption by making homeowners believe they have greater net worth and employment (Calbreath, 2005).
There is a strong relation in the housing market (starts) and the industrial production sector. When it comes to finished goods and the running P.P.I. and C.P.I., housing starts play a very vital role in that equation. Reports state that, “industrial production (in America) grew by 0.3% in February; the value of retail sales increased by 0.5%, and housing starts rose by 0.5% to a 21 year high” (The Economist, 2005). In relation to housing starts, industrial production, and consumer spending, housing and inventory investment are expected to top out (historical trends show that they generally do during times of economic expansion). These two (housing and inventory investment) sectors accounted for 17% of the growth in real GDP last year. Capacity utilization in manufacturing sectors is rising. Increased employment has helped to generate needed expansion in the industrial/manufacturing components. An example of this type of growth is in the HVAC component manufacturing business. When there are new housing starts, new business development, and renovation work spurred by lower interest rates, the growth and increase in business trickles down to the lowest level of worker and helps in many aspects of the economy. There has been a significant resurgence in U.S. productivity growth that started as early as 1995. Lead by the IT (information technology) sectors and those components that use IT equipment and software, we recorded an intense acceleration in productivity growth. Projections report (
As we incorporate and utilize these various indicators as valid tools in economic forecasting and managerial decisions, we must realize the relationships each has to the specific sector/component of the overall economy. “It would be foolish to disregard market expectations without careful thought as to whether they may contain useful information about the future economy, the outlook for inflation, and interest rates (just to mention a few)” (www.mortgagebankers.org). In relation to pinpointing projected changes in any economical sector, possible outcomes and verified reasoning for past, current, and future trends are established through the use of historical data and related correlation. Although with the complexity of many economic and technical variables involved with forecasting bullet-proof trends/outcomes are hard to construct and are even harder to produce. The art of forecasting is greatly symmetrical to that of investing. The science requires skills in using mathematical principles in establishing distinctive insights and trends regarding benchmarked data (Brown, 2005). For example, an analyst or manager might look at the construction cycle