The Little Book of Economics: How the Economy Works in the Real World, Revised and Updated

Chapter Three

In-Flight Monitor

Tracking and Forecasting the Business Cycle from Takeoff to Landing

On a coast-to-coast flight you can relax with a drink and watch your progress on the video monitor in front of you, up to the minute you descend into your destination city. Wouldn’t it be nice if we could do the same with the economy: Flip on a screen and know instantly where the economy is, how fast it’s growing, and whether a recession lies ahead.

Unfortunately, when you clamber into the economy’s cockpit you discover erratic and imprecise instruments, a filthy windshield, and outdated, faded maps. Still, imperfect though they are, we have a wealth of data and tools with which to track the economy’s journey.

The Four Engines of the Economy

The most popular way of tracking the economy is by looking at its four principal categories of spending. If the economy is an airplane, then its four engines are consumers, businesses, government, and exports. Its speed depends on the power of all of these engines. However, these engines aren’t all the same size and they operate at different speeds. Below are their average shares of total GDP from 2007 through 2011. They total more than 100 percent of the gross domestic product (GDP), because imports are subtracted from GDP.

• Consumer spending on goods and services: 70 percent.
• On housing, apartments and renovations 3 percent.
• Business investment in buildings: 3 percent.
• In equipment: 8 percent.
• Investment in inventories: zero.
• Government spending: ...