Why Is GDP Not Useful For Looking At Freight Conditions In The Economy?

Gross domestic product (GDP) is the most commonly referenced metric of economic activity and is tracked by economists, market analysts and politicians to gauge the strength of economies. It measures the final value of all goods and services within an economy in a given period and serves as the broadest measure of total production and output.

SONAR Real Goods Adjusted GDP Year over Year
Source: SONAR – OTRI.USA, GAGDPY.USA

Why shouldn't I use GDP gauge the freight outlook?

The overall GDP number is not very useful when looking for insight into freight conditions in the economy. The U.S. economy is dominated by the service sector, which includes segments like healthcare, education and financial services. These areas make up over half of all of the economic activity in the U.S., but do not play a significant role in freight movements in the economy. As a result, as long as the service sector is healthy, the U.S. economy can continue to grow even if the production and transportation of goods is stalling.

How should I interpret the GDP

Due to the strength of the service sector, the total GDP growth figure is likely to misrepresent the state of the freight economy. That does not mean that the GDP figures should be completely disregarded, however. The details within the GDP release contain valuable information about the flow of goods in the economy, and a breakdown of the components of GDP can help create a better understanding of how the various areas of freight perform during any given quarter.

What components of GDP should I care about? 

Goods-adjusted GDP looks at private final goods demand in the economy. It excludes services and non-tangible goods from the calculation and does not exclude imported goods.

Formula: Goods consumption + Nonresidential fixed investment in equipment + Nonresidential fixed investment in equipment + residential fixed investment + goods exports.

The broader goods-adjusted GDP values give a better representation of freight activity in the economy by looking at the demand for goods. Other factors should be considered when looking at the freight market, such as inventory trends and government activity. Still, the final demand for goods is a good starting point for understanding freight volumes during any given period. In addition, a look at the various components of goods-adjusted GDP will illustrate what areas of the freight economy are driving overall volume performance.

Image by Pexels from Pixabay