What Are the Drivers of U.S. Economic Growth?

The U.S. has been blessed by an abundance of natural resources in a large land mass, comparable only to Russia, Canada and Australia. These resources include: tillable soil in the Great Plains, known as the breadbasket of the world, a temperate climate, large deposits of oil, coal and natural gas. These natural resources attracted another of America's great resources -- its people. Since the U.S. has a lot of people within its borders, domestic companies have become very good at knowing what consumers want. This has given the U.S. a comparative advantage in producing consumer products. As a result, over 70% of what the U.S. produces is for personal consumption. This gives the U.S. economy an advantage in exporting, making the U.S. the world's fourth largest exporter. The U.S. exports capital equipment, such as computers, semiconductors and medical equipment, as well as industrial machinery and equipment, such as plastics, chemicals and petroleum products. Nearly half of the strength of the economy is based on services, such as financial services, health care and intellectual property, such as technical information.

Homebuilding is usually a sign of economic growth. (Photo: Justin Sullivan/Getty Images) Question: What Is Economic Growth? Answer: Economic growth is the most watched economic indicator. It tells you how much more the economy is producing than it did before. If the economy is producing more, businesses are more profitable, and stock prices rise. This gives companies capital to invest and hire more employees. As more jobs are created, incomes rise. This gives consumers more money to buy more products and services, driving more economic growth. For this reason, all countries want positive economic growth.

How Is Economic Growth Measured?

Economic growth is measured by changes in the gross domestic product, or GDP. This measures a country's entire economic output for the past year. This takes into account all goods and services that are produced in this country for sale, whether they are sold domestically or sold overseas. It only measures final production, so that the parts manufactured to make a product are not counted. Exports are counted, because they are produced in this country. Imports are subtracted from economic growth. Measurements of economic growth do not include unpaid services, such as the care of one's own children, unpaid volunteer work for charities, or illegal or black-market activities. Because these

are not measured as part of economic growth, their impacts on the well-being of a society are not taken into account. Economic growth is measured by real GDP. This is done to compensate for the effects of inflation.

The Phases of Economic Growth

Economic growth is watched to find out what stage of the business cycle the economy is in. The most desirable phase is expansion, when the economy is growing sustainably. If growth is too far beyond a health growth rate, however, then it can overheat and create an asset bubble. This is what happened in 2005-2006 with housing. As too much money chases too few goods and services, inflation kicks in. This is usually the "peak" phase in the business cycle. At some point, confidence in economic growth dissipates. When more people sell than buy, the economy enters the contraction phase of the business cycle. When economic growth becomes economic contraction, it's known as a recession. An economic depression is a recession that lasts for a decade. The only time this happened was during the Great Depression of 1929.

What Are the Drivers of U.S. Economic Growth?

The U.S. has been blessed by an abundance of natural resources in a large land mass, comparable only to Russia, Canada and Australia. These resources include: tillable soil in the Great Plains, known as the breadbasket of the world, a temperate climate, large deposits of oil, coal and natural gas. These natural resources attracted another of America's great resources -- its people. Since the U.S. has a lot of people within its borders, domestic companies have become very good at knowing what consumers want. This has given the U.S. a comparative advantage in producing consumer products. As a result, over 70% of what the U.S. produces is for personal consumption. This gives the U.S. economy an advantage in exporting, making the U.S. the world's fourth largest exporter. The U.S. exports capital equipment, such as computers, semiconductors and medical equipment, as well as industrial machinery and equipment, such as plastics, chemicals and petroleum products. Nearly half of the strength of the economy is based on services, such as financial services, health care and intellectual property, such as technical information.

Ways to Spur Economic Growth

Most governments try to manage economic growth. For one thing, when the economy is growing, businesses make more money, which increases tax revenue. They also hire more people, which increases income. When people feel prosperous, they reward political leaders by re-electing them. The government can stimulate the economy through expansive fiscal policy, which is spending on government programs or tax breaks. Since politicians want to get re-elected, they use expansive fiscal policy to stimulate the economy. Expansive fiscal policy is addictive. If the government keeps spending more and taxing less to spur economic growth, it leads to deficit spending. This works for a while, but eventually leads to higher debt levels. In time, as the debt to GDP ratio approaches 100%, it can slow economic growth. Foreign investors may stop investing funds in a country with a high debt ratio, because

they are worried they won't get repaid, or that the money will be worth less. Therefore, governments should be careful with expansive fiscal policy. It should only use it when the economy is in contraction or recession. When the economy is growing, its leaders should cut back spending and raise taxes. This conservative fiscal policy will ensure that the economic growth will remain healthy U.S. GDP is the most important economic indicator, because it tells you the health of the economy. There are four major components of GDP: 1. Personal Consumption Expenditures - All the goods and services produced for household use. This is 70% of total GDP. 2. Business Investment - Goods and services purchased by the private sector. 3. Government Spending - This includes federal, state and local governments. 4. Net Exports - This is the dollar value of total exports minus total imports.

GDP Outlook:
The Philadelphia Federal Reserve surveyed 46 economists, who predict that GDP will remain on the low end of a healthy growth rate for the next four years: 1.9% in 2013, 2.8% in 2013, 2.9% in 2014 and 3% in 2016. Growth won't be greater for three reasons: 5. First, deficit-reduction will cut back government's contribution to GDP. 6. Structural unemployment has forced many older workers to reduce their standard of living. 7. The Fed will soon end its expansionary monetary program of quantitative easing. That's because the core inflation rate is bumping up against the Fed's 2% target inflation rate. What's boosting GDP? 8. Companies are exporting to growing emerging market countries. 9. Home prices are rising steadily, now that foreclosures have finally been absorbed. 10. Companies are being pressured by stockholders to invest their excess cash into profitable ventures to gain a greater return. Growth needs to be 3% or greater to really stimulate job creation. Therefore, the unemployment rate will improve slowly: 7.7% in 2013, 7.2% in 2014, 6.7% in 2015, and 6.3% in 2016. This will limit demand, further limiting growth.

U.S. Economic Outlook

The outlook for growth in the U.S. is cautiously positive. Strength in the housing market, exports to emerging markets and increased domestic oil production is hampered by uncertainty over fiscal policy. .

Two highly credible organizations, the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD), both predict 2-3% GDP growth for 2013 IF the U.S. government can: 11. Avoid sequestration. Instead, Federal spending reductions should total no more than 1.25% of GDP, and should be phased in gradually. 12. Raise the debt ceiling without another crisis. 13. Reform entitlement spending and the tax code.