We have spent a lot of time this year talking about tariffs, inflation and the stock market. I want to take a bit of a break. We will talk more about all of those because we must – they are important and very timely. But, for this week I would like to get back to basics and have a discussion about GDP (Gross Domestic Product), what it is and how the statistics can sometimes be used well and other times poorly.
First, what does Gross Domestic Product include? GDP is the sum of consumption, government spending, investment and net exports. To break it down:
Consumption- is consumer spending which includes everything that we as consumers spend money on from groceries to homes to vacations. For the US, consumer spending is two-thirds of GDP.
- Government spending is every dollar the government spends - federal, state and local. This includes spending on things like payroll, fighter jets and new roads and bridges.
- Investment encompasses private businesses’ capital expenditures. Where new roads and bridges are included in government spending, a new factory would be included in investment because it’s a private company making the investment.
- Net exports are total goods and services exported minus total goods and services imported. When net exports are a negative number, GDP is reduced. This is often the case in the US because we import more than we export.
In the charts below, you see US GDP by quarter since Q4 2023. Q1 2025 is negative. But if you look at the second chart which breaks down Q1 2025 GDP, you will see that net exports are a large reason why the overall GDP is negative. Is this due to business stocking up before tariffs were implemented? Probably, but we will need to continue to watch the data. Both government spending and consumer spending were also down in Q1 2025 but not to the extent that net exports changed.
According to the International Monetary Fund (IMF), if you add up the GDP of all countries it totals over $110 trillion. The US and China have the largest shares of that with the US at about $30 trillion and China near $19 trillion. If you do the math, that means the US and China account for about 45% of the world’s GDP. It’s one of the reasons that the trade war with China is so impactful. Germany, India and Japan round out the top five countries by GDP. World Economic Outlook (April 2025) - GDP, current prices
Now if you look at GDP per capita, you get a different look. Singapore has the largest GDP per capita per the IMF. After Singapore is Luxembourg, Macao, Ireland, and Qatar. The US is number ten and China is number seventy-seven. Does GDP per capita mean that people that live in Singapore are wealthier than those in the US because the country has a higher GDP per capita? No – well not necessarily – it means that when you divide the Singapore’s GDP by the number of people, that number is higher than the US’. To decide if the people are wealthier you need to take into account the income inequality of the country – and that is for another newsletter. But if you are curious - when you look at the wealth of the bottom 50% of the population in the US, China, Singapore and Luxembourg you get this:
- US - the bottom 50% of population, has 1% of the wealth and 13.5% of the income
- China - the bottom 50% of population, has 6% of the wealth and 13.7% of the income
- Singapore - the bottom 50% of population, has 3.8% of the wealth and 18.5% of the income
- Luxembourg - the bottom 50% of population, has 4% of the wealth and 19% of the income
Here is a link to a very interactive site about wealth/income inequality. Home - WID - World Inequality Database
AI – Are We Ready for This?
We have been hearing about AI and the implications of its adoption for some time. I know that I have been reading everything I can about it and still don’t appreciate what is coming. I vacillate between being excited about the efficiencies that AI will bring and nervous about the disruption of the status quo. What jobs will be replaced, how fast will it all happen and who will be the winners and losers? It’s coming so we better start preparing for the pros and the cons. Here is one of the clearest articles I have read recently that lays out what may be just around the corner. Axios AM
Financial Planning/Investment Strategy Corner:
The 4% Rule
What is the 4% Rule – the theory that you can withdraw 4% of your initial portfolio balance and each year increase the withdrawal base on inflation and this will ensure your investments will last at least 30 years. The 4% rule has been around since the mid-1990s and was first introduced by Bill Bengen. William Bengen - Wikipedia
Is the 4% rule still valid? Well, it depends on who you listen to. MorningStar did an analysis of the rule and came up with the idea that 3.7% is a better number. Morningstar But Bill Bengen has also reevaluated his original study and he has revised his number to 4.7% and adds that this is a conservative number. Bengen
What I came up with after diving into this is that following a guideline like the 4% rule is a great starting point. But everyone is different, and everyone’s situation is different, so a personalized financial plan is the best way to make decisions that affect your life and your enjoyment of that life as much as the amount of money you can spend does.
Simple rules are great, but this is just too important to put everyone in the same box.
Quick Hits:
- Father’s Day is coming. Here are some great craft ideas for kids. Father's Day Crafts for Kids
- And some Father's Day BBQ Ideas - FATHER'S DAY BBQ IDEAS
- With the sun finally here, I have been working in my flower gardens. I assume I am in good company. Here are some ideas How to Plant Perennials in Four Simple Steps 31 Best Perennial Flowers How to Design a Perennial Garden
- I have to admit this one is here because I read the title and thought “well that is the dumbest thing I have read in a while” so I had to click on it. It’s actually interesting and not what you think when just reading the title. New study finds unexpected link between physical pain and depression
- $3,500 for an iPhone – really?! $3,500 American Made iPhone May Slash Apple Sales By $153 Billion
Making It Home
I have mentioned in previous newsletters that I am a member of the board of a newly formed non-profit named Making It Home. We work with advocates helping newly housed people. We will celebrate our one-year anniversary on Tuesday, June 25th from 5:30 to 7:30pm by hosting an open house at our new warehouse space at 104 Thadeus Street in South Portland. Feel free to stop by to say hello and find out more about us. Here is some more information Making It Home
Quotes to Consider – June is almost here:
“In early June the world of leaf and blade and flowers explodes, and every sunset is different.” John Steinbeck
“It’s a cruel season that makes you get ready for bed while it’s light out.” Bill Watterson
Thank you for reading RSWA Financial Advisor Insights! We welcome feedback and please forward this to a friend! Be well, take care, and stay safe!
