Growth & Output Dashboard

Understanding Economic Growth & Output Indicators

What is Real GDP and why does it matter?

Real Gross Domestic Product (Real GDP) is the most comprehensive measure of economic activity in the United States. It represents the total value of all goods and services produced in the economy, adjusted for inflation to provide a consistent comparison over time.

Real GDP is measured in billions of "chained 2017 dollars," meaning all values are adjusted to 2017 price levels. This allows us to see genuine economic growth rather than just price increases. When Real GDP rises, the economy is producing more goods and services, which typically translates to:

• Job creation as businesses expand to meet demand
• Higher corporate earnings as companies sell more products
• Rising incomes as employment and wages increase
• Stronger stock market as corporate profits grow

Conversely, declining Real GDP signals economic contraction, potentially leading to layoffs, lower profits, and weaker markets. Two consecutive quarters of declining GDP technically defines a recession.

How do I interpret the GDP Growth Rate?

The GDP Growth Rate shows the percentage change in Real GDP from one quarter to the next (quarter-over-quarter or QoQ). This tells us the pace of economic expansion or contraction.

Here's how to interpret different growth rates:

• Above 3-4% annually - Robust growth. The economy is expanding rapidly, which supports job creation and corporate earnings but may raise inflation concerns.
• 2-3% annually - Moderate growth. Considered healthy and sustainable without overheating the economy.
• Below 2% annually - Sluggish growth. Indicates a slowdown in economic activity and potential weakness ahead.
• Negative growth - Economic contraction. Two consecutive quarters of negative growth defines a recession.

For investors: Strong GDP growth supports stock prices as corporate revenues and earnings tend to rise with overall economic activity. However, very high growth can trigger Federal Reserve rate hikes to combat inflation, which can pressure stock valuations. Moderate, sustained growth is often the sweet spot for equity markets.

What does the Industrial Production Index tell me?

The Industrial Production Index measures output from three key sectors: manufacturing, mining, and utilities. It's an important leading economic indicator because changes in industrial production often precede changes in overall GDP.

The index is set to 100 in 2017, so:

• Above 100 means industrial output has expanded since 2017
• Below 100 means industrial output has contracted since 2017
• Rising index indicates growing demand for manufactured goods, suggesting economic expansion
• Falling index suggests weakening demand and potential economic slowdown

Why it matters: Industrial production is sensitive to economic cycles. When businesses and consumers increase spending, factories ramp up production. When demand weakens, production falls quickly. Tracking this indicator helps investors anticipate broader economic trends before they show up in GDP data. Manufacturing stocks (industrials, materials) are particularly sensitive to changes in this index.

How should I interpret Capacity Utilization?

Capacity Utilization measures the percentage of total production capacity that is currently in use across all industries. Think of it as how "full" the economy is running relative to its maximum potential output.

Here's how different utilization levels signal economic conditions:

• Above 80% - Economy running hot. Strong demand is pushing factories near full capacity. This can lead to bottlenecks, rising costs, and inflation pressure. Often seen late in economic expansions.
• 77-80% - Healthy utilization. The economy is growing without overheating. This balanced range supports sustainable growth without excessive inflation.
• 75-77% - Moderate utilization. Some slack capacity remains. Room for growth without immediate inflation concerns.
• Below 75% - Low utilization. Indicates weak demand and excess capacity. Suggests economic slack and potential for further slowdown.
• Below 70% - Very low utilization. Often signals recession or very weak economic conditions.

For investors: High capacity utilization can be a double-edged sword. It indicates strong demand (good for revenues) but can lead to inflation and Fed rate hikes (bad for valuations). Low utilization suggests weak demand but also provides room for growth without inflation pressure. Watch for inflection points where utilization starts rising from low levels, as this often signals early economic recovery.

What does Consumer Sentiment measure?

The University of Michigan Consumer Sentiment Index surveys consumers about their confidence in the economy and their personal financial outlook. It's a leading indicator because consumer spending drives approximately 70% of US GDP.

The index is based on consumer surveys asking about:

• Current personal financial situation
• Expected personal financial situation in the year ahead
• Expected business conditions in the year ahead
• Expected business conditions in the next five years
• Buying conditions for major household items

Interpreting sentiment levels:

• Above 90 - High confidence. Consumers feel optimistic and are likely to increase spending, supporting economic growth.
• 80-90 - Moderately high confidence. Generally positive outlook with healthy consumer spending.
• 70-80 - Moderate confidence. Consumers are cautious but not pessimistic.
• Below 70 - Low confidence. Consumers are worried about the economy and likely cutting discretionary spending.
• Below 60 - Very low confidence. Often seen during recessions when consumers are deeply pessimistic.

For investors: Consumer sentiment is a forward-looking indicator. When sentiment is high, consumers are more likely to make major purchases (cars, homes, appliances), which drives economic growth and supports retail, consumer discretionary, and industrial stocks. When sentiment plunges, it often precedes actual declines in consumer spending and can signal economic trouble ahead. Watch for sharp drops in sentiment as early warnings of potential recessions.

How do I use these indicators together?

The power of these indicators comes from analyzing them together to paint a complete picture of economic health. Here's a practical framework:

Confirming economic expansions: When Real GDP is growing, GDP Growth Rate is positive, Industrial Production is rising, Capacity Utilization is increasing, and Consumer Sentiment is high, the economy is in a healthy expansion phase. This environment typically supports stock market gains, particularly in cyclical sectors like industrials, materials, and consumer discretionary.

Identifying late-cycle risks: If GDP growth remains strong but Capacity Utilization is very high (above 80%) and Consumer Sentiment starts declining, this warns of potential overheating. High utilization can lead to inflation and Fed rate hikes, while falling sentiment suggests consumers are getting nervous. This combination often appears late in economic cycles before recessions.

Spotting early recovery: When GDP Growth turns positive after contraction, Industrial Production starts rising from low levels, and Consumer Sentiment improves from depressed levels, this signals early economic recovery. This is often the best time to invest in cyclical stocks before the recovery becomes obvious to everyone.

Warning of recessions: If GDP Growth is declining, Industrial Production is falling, Capacity Utilization is dropping, and Consumer Sentiment is plunging, these are clear recession warnings. This environment favors defensive sectors (utilities, consumer staples, healthcare) and bonds over cyclical stocks.

Grades provide context: Each indicator is graded (A+ to D) based on its percentile rank over the past 20 years. An A+ grade means the indicator is in the top tier historically, while a D grade suggests bottom-tier readings. When multiple indicators have poor grades simultaneously, the economy is likely in serious trouble. When all grades are strong, the economy is firing on all cylinders.