Preparing CPAs to Discuss the Economic Health of the US



CPAs, their clients, and others read the headlines in recent days that heralded the record-breaking 33.1% growth in the Q3 gross domestic product (GDP). Economists and far-right, far-left, and centrist media outlets agree that—with some caveats—the growth was very good, and the economy was rebounding. Some have said that prior to the pandemic, the US had the greatest economy in history. Here are a few things a CPA should consider when discussing GDP. 

“GDP is a comprehensive measure of economic activity, and the most popular indicator of the nation’s overall economic health,” according to the Bureau of Economic Analysis of the US Department of Commerce (BEA), which calculates the GDP.  

The GDP increased for the quarter but what about the other side of the ledger, and what about the longer term? Accountants are trained to understand numbers on both sides of the ledger, and their accuracy, relationships and trends. Accounting, which can be viewed as a process for writing the economic and financial history of an organization, focuses on understanding the numbers and the big picture and not just on a single metric.  

This is especially true because the GDP metric that is publicly reported in the BEA’s Advance announcement is derived from an incomplete, sample survey of selected businesses in twenty-two major industry groups to calculate an estimate. The estimate is then seasonalized and annualized. Over the next two months, the Advance estimate will be reassessed twice to improve accuracy —adjusted up or down—by incorporating additional source data unavailable throughout the previous month. Regardless of the outcome, it is the headline grabbing Advance metric that will be remembered. BEA does not provide a detailed analysis as to what drove the growth to provide context. Was the growth organic, manufactured (including via steroids - e.g., debt), something else, or some combination of factors?

The following looks at the current dollar (nominal) GDP and total public debt outstanding (i.e., national debt). Deficit spending requiring national debt is a key driver of GDP growth. Unlike the estimated GDP, the national debt is a real number. It is calculated, down to the penny, for each business day by the US Treasury, the issuer of the debt.  

The Q3’s record-breaking 33.1% increase following the Q2’s near record-breaking 31.4% decline resulted in a net six-months GDP decline of $0.4 trillion to $21.2 trillion or -2%, while national debt increased by $3.3 trillion to $27.0 trillion or 14%. 

In the year to date, through Q3, GDP declined by $0.6 trillion to $21.2 trillion while debt increased by $3.8 trillion to $27.0 trillion. At the end of Q3, the debt-to-GDP ratio was 126%. Put another way, the national debt increased $1.26 for every one dollar the GDP increased.  

By the end of 2018 and 2019, the GDP increased $1.0 trillion and $0.8 trillion, respectively, while the national debt increased by $1.5 trillion and $1.2 trillion, resulting in year-end debt-to-GDP ratios of 105% and 107%, respectively.  

Accountants can see that the national debt, a primary driver of GDP, is greater and rising faster than the GDP. If personal, business, and state and local debt, which also drives growth, are included the debt-to-GDP metrics is worse—much worse.  

Before COVID-19, the debt-to-GDP was over 100%. Its historical average—excluding the past few decades—was around 40%. Prior to the pandemic, the country posted a trillion-dollar annual deficit. At that time, the nonpartisan Congressional Budget Office projected continued trillion-dollar plus annual deficits for at least the next ten years.  

Peering into the immediate future, it is projected there will be a continued strain on GDP growth and a high probability of more trillion-dollar plus debt packages, on top of the already baked in trillion-dollar plus annual deficits. Additionally, every major trust fund (Medicare, Social Security, etc.) is racing towards insolvency with no agreed upon plan to address the problems. 

The more a CPA understands about the GDP—the overall health of the economy—based on numbers, relationships, trends, and behaviors, the better equipped they will be to have constructive conversations with clients and others. And the more confidence clients and others will have in the CPA.

Source: MICPA

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