Oil and GDP

The standard equation for calculating GDP is C+I+G+(X-M)

C= personal consumption expenditures
I= gross investments
G= government spending
X= exports
M= imports

In periods of prosperity it is generally considerable desirable to have GDP increasing between 3-5% on an annual basis. Over 5% is considered unsustainable and inflationary. Under 3% is considered weak growth and possibly recessionary.

A recession is typically defined in textbooks as two consecutive quarters of declining GDP. The National Bureau of Economic Research (NBER), the organization that officially dates recessions uses a slightly different method. Read about it here.

Currently we have a $14 trillion economy that had a growth rate of 0.6% in the 4th quarter of 2007. We are still in the 1st quarter of 2008, yet the media and most people seem to be convinced that we are in a recession already. Maybe, only time will tell.

Predicting recessions and the economic future is not an exact science. Numerous thing could occur to greatly improve or diminish the economic outlook on a daily basis. There are many factors to consider.

Back to GDP. If GDP is increasing it is generally considered good. Slow growth has a lot of people worried but it is still growth.

But if oil stays at $100 a barrel for the next 12 months, consumers will have shelled out an extra $100 billion on oil by next year. That's an extra $100 billion not being spent at the mall, mega-mart or multiplex.

"The entire stimulus package could be drained by higher energy costs," Lafakis said, referring to the $120 billion lawmakers will refund to taxpayers in an effort to keep the economy out of recession. "That has the potential to turn a mild recession into something more dark."

Of course, high oil prices are not the only thing weighing on consumer spending, which accounts for about two-thirds of all U.S. economic activity. Declining home values mean people can't access cash through a home equity loan or profit from higher sale prices. In addition, the economy is shedding jobs, and unemployed people tend to spend less money.

"On its own, $100 oil wouldn't pull the economy into recession," said Beth Ann Bovino, a senior economist at Standard and Poor's. "But given the other factors, it's just another shoe to drop."

from CNN

Now people are being told that it is how consumers are spending their money that matters. If you spend money on gas or at the mall GDP does not change. However, it does have a broader economic impact that is not immediately reflected in GDP numbers.

The main point is you can have "bad" economic times with a recession. Also, a recession is not necessarily bad for everyone.

People also should save money for the unexpected and unpredictable future events.