Demystifying GDP

Gross Domestic Product (GDP) is one of the most widely used and cited economic indicators.  One cannot discuss the economy of a country or a region without talking about the national or regional GDP. However, many often misunderstand GDP. Specially, some may confuse GDP with the value of the total output (revenue) of an economy.

The reason GDP is misunderstood can be traced to its intended use. The origin of GDP is the need for an economic indicator to measure the overall size of a national or regional economy, so that people can compare which country has the largest or second largest economy in the world. When we think of a business such as a retail shop or a manufacturing plant, we typically use their total sales or revenue as an indicator of the size of their business. For example, Fortune magazine routinely publishes America’s 500 largest companies based on their total revenue. Similarly, when we need a measure of the size of a national or regional economy, it is natural for people to think of this measure as the sum of the revenue (output) of all businesses in a country or region.

While that thinking has its merit, total output (revenue) it is not a good indicator of a true size of the national or regional economy because it allows the possibility of double counting, which could inflate the size of an economy. Consider a business, which buys cotton from famers, and make shirts for the consumer. It has two plants—one turns cotton into fabric, and the other plant has sewing machines to stitch fabrics into shirts. Each shirt sells for $50 dollars. If the business makes only one shirt, the total revenue for the company is $50. 

What if the owner decides to split the two plants into two separate businesses: one produces fabric and the other purchases the fabric and produces shirts?  If the price of the fabric is $20, the total revenue of those two separate companies are $70, while the total sale of the company prior to split is $50. Even though only one shirt is produced in the process, the total output jumps from $50 to $70. One would think the economy represented by two companies is larger, even though only one shirt is produced. The difference is that the value of the fabric is included in both the revenue of the fabric and shirt companies.  This example shows that summing up total output (revenue) of all businesses in a country or region is not a good measure of the true size of the economy due to the fact that the value of the intermediary goods (in this case the fabric) is counted twice or multiple times.

Thus, the concept of GDP was born. GDP is the sum of all companies’ total sales minus the value of the intermediary inputs.  The difference between the total sales and the intermediary input is also defined as the value added of a business. Another commonly used definition of GDP is that it is the sum of consumer expenditures, business investment, government spending, and net exports. This definition is equivalent to the total value added of a country or region, because this definition counts only the value of final products and services; and not the value of intermediary products.

What types of values are added to the intermediary inputs and turned into another product? As the following diagram shows, the main components of value added are the labor income, business tax, and gross surplus.  In addition, gross surplus is made up of the consumption of capital (or depreciation), corporate profits, and other income such as rents, interest, and proprietors’ income. 

In 2014, U.S. GDP (or value added) was 54% of the total output of the country. Within GDP, more than half (53%) of it is labor income, with the rest making up gross surplus and business tax.

De-mystifying GDPDe-mystifying GDP

How Competitive is Your MSA?

A tortilla-manufacturing firm is in a high-growth phase of their business cycle. They are looking for an MSA to locate their expanding operations with an expected 250 employees. Where should they begin their search? What are the key attributes around their geolocation decision? Let’s start with labor availability.

According to LaborEQ, they should give the following regions a serious look:

RegionLabor Availability
Atlanta-Sandy Springs-Roswell, GA MSA99%
Dallas-Fort Worth-Arlington, TX MSA 100%
Chicago-Naperville-Elgin, IL-IN-WI MSA 100%
Phoenix-Mesa-Scottsdale, AZ MSA 97%
Houston-The Woodlands-Sugar Land, TX MSA99%
Source: LaborEQ

The top 3 occupations needed for a firm in this industry are:

  1.        Bakers
  2.        Food Batchmakers
  3.        Packers and Packagers, Hand

Source: JobsEQ®

Wages are another important consideration.  They are affected by the cost of living in a region. So how competitive are the MSAs where the most bakers live and work today? If we consider the wages and regional cost of living for the top 10 regions in the nation that employ the most bakers, Houston has the lowest annual average wage for bakers, $22,100 with a related cost of living adjustment (COLA) of 92.9 where the U.S. COLA equals 100. In other words, the COLA in Houston is 8% lower than the average of the nation. Home values are an important component of COLA. And for regions employing the most bakers, Houston’s home values are certainly more affordable for employees that work in tortilla manufacturing.

US Rank Region Employment Avg. Annual Wages Cost of Living Index Median House Value
1 New York-Newark-Jersey City, NY-NJ-PA MSA 12,810 $28,000 154.5 $400,000
2 Los Angeles-Long Beach-Anaheim, CA MSA 8,707 $25,100 153.6 $454,200
3 Chicago-Naperville-Elgin, IL-IN-WI MSA 6,982 $26,300 102.9 $217,300
4 Dallas-Fort Worth-Arlington, TX MSA 4,083 $23,800 97.4 $151,900
5 Boston-Cambridge-Newton, MA-NH MSA 3,946 $29,200 136.9 $363,600
6 Houston-The Woodlands-Sugar Land, TX MSA 3,751 $22,100 92.9 $144,000
7 Atlanta-Sandy Springs-Roswell, GA MSA 3,740 $23,200 99.9 $167,400
8 Miami-Fort Lauderdale-West Palm Beach, FL MSA 3,581 $24,300 112.3 $188,700
9 Philadelphia-Camden-Wilmington, PA-NJ-DE-MD MSA 3,489 $28,300 108.3 $237,600
10 San Francisco-Oakland-Hayward, CA MSA 3,229 $30,200 204.5 $592,000

To request a demo of LaborEQ, click here.

May is Graduation Month

Employment is brighter for some graduating students than for others, depending on the degree earned. Registered nurses (RNs) top the list for most in demand in the nation over the next decade with an expected 1,110,841 openings. About 60% of the job openings are expected because RNs are either retiring or changing occupations (called replacement demand in the table). A bachelor’s degree is typically required to be an RN and it pays an entry wage of around $48,500. According to the latest data (fourth quarter of 2015), there are 2.9 million employed RNs in the nation. The annual average wage for all RNs is $69,800.

Other occupations in high demand over the next decade include general and operations managers, accountants and auditors, and computer systems analysts.

Top 10 Occupations in the Nation with Most Openings that Typically Require a Bachelor's Degree, 2015-2025
CurrentForecast
Four Quarters Ending with 2015q4 Over the Next 10 Years
OccupationEmployment Avg. Annual Wages(1) Total Replacement Demand Total Growth Demand Total Openings Entry-Level Wages(1)
Registered Nurses 2,855,420 $69,800 674,656 436,185 1,110,841 $48,500
General and Operations Managers 2,153,362 $117,200 578,853 160,090 738,943 $51,900
Managers, All Other 956,533 $110,200 581,923 69,310 651,233 $61,100
Accountants and Auditors 1,329,500 $73,700 395,893 157,410 553,303 $43,900
Elementary School Teachers, Except Special Education 1,304,861 $56,800 278,301 68,513 346,814 $38,200
Software Developers, Applications 761,466 $99,500 128,545 156,726 285,271 $61,700
Secondary School Teachers, Except Special and Career/Technical Education 915,675 $59,300 218,530 48,529 267,059 $39,700
Management Analysts 737,144 $90,900 136,669 108,926 245,595 $49,800
Computer Systems Analysts 572,220 $87,300 82,653 125,941 208,594 $54,900
Financial Managers 548,319 $130,200 141,656 39,332 180,988 $68,600
1. Occupation wages are as of 2014.
Source: JobsEQ

Preschool teachers top the list of in-demand occupations for jobs that typically require an associate’s degree. Openings in the nation are expected to total 151,181 over the next decade with entry-level wages of $20,000.

Entry-level wages for some jobs that require an associate’s degree pay better than those requiring a bachelor’s degree.  For example, the entry-level wage for the average dental hygienist in the nation is $52,600 and the education required is an associate’s degree compared to a registered nurse requiring a bachelor’s degree who has an entry wage of $48,500.

When determining a major for post-secondary degrees, the forecasted number of openings and entry-level wages is important to both the employer and the new hires coming out of the education pipeline.

Top 10 Occupations in the Nation with Most Openings that Typically Require an Associate's Degree, 2015-2025
CurrentForecast
Four Quarters Ending with 2015q4Over the Next 10 Years
OccupationEmployment Avg. Annual Wages(1) Total Replace-ment Demand Total Growth Demand Total Openings Entry-Level Wages(1)
Preschool Teachers, Except Special Education 427,081 $32,000 121,808 29,373 151,181 $20,000
Paralegals and Legal Assistants 268,735 $51,800 58,260 21,671 79,931 $32,500
Web Developers 154,910 $68,700 28,230 44,016 72,246 $37,500
Dental Hygienists 202,937 $72,000 32,322 37,769 70,091 $52,600
Medical and Clinical Laboratory Technicians 169,257 $40,800 38,609 29,661 68,270 $27,200
Physical Therapist Assistants 81,908 $54,300 26,249 33,001 59,250 $35,800
Radiologic Technologists 205,569 $57,500 36,532 17,181 53,713 $39,900
Respiratory Therapists 127,245 $58,500 29,213 14,499 43,712 $43,300
Life, Physical, and Social Science Technicians, All Other 69,799 $47,900 35,992 5,391 41,383 $28,300
Computer Network Support Specialists 180,776 $66,100 24,555 15,431 39,986 $39,000
1. Occupation wages are as of 2014.
Source: JobsEQ

Defense Contract Spending Declines $66 Billion from Fiscal Year 2009 to 2015

The map below shows defense contract spending by MSA from FY 2000 to 2015. The circles are proportional (i.e., they are scaled to the value of defense contracts in that MSA). Beginning in FY 2001, the color of each circle indicates whether defense contract spending in the MSA declined (red) or increased (green) from a year earlier. The map can be manually advanced or will advance automatically when you click on “Play.”

The table below the map shows DoD contract spending in the top 100 MSAs and updates each time a new fiscal year is selected. The map informs the following question categories:

  •         Which MSAs are the largest recipients of DoD contract spending?
  •         In which regions is DoD contract spending concentrated?
  •         In which MSAs is DoD contract spending increasing/decreasing from the prior year?

For example, the map shows DoD contract spending surges in the Washington, D.C. MSA from FY 2000 to FY 2010 when spending climbed from $8.0 billion to $39.5 billion before declining beginning in FY 2011.

To learn more about Chmura’s expertise and research regarding defense spending and supply chain mapping, contact us here.

Department of Defense (DoD) contract spending grew at a strong pace in the first decade of the 21st century, but has been in decline since fiscal year (FY) 2010 based on Chmura’s proprietary FedSpendTOP data.[1],[2] Spending peaked at $336.7 billion in FY 2009 and has since fallen by 19.6% to $270.7 billion in FY 2015.[3] Contributing to the decline was the Budget Control Act of 2011 (sequestration took effect in 2013) and the drawdown of U.S. forces in both Iraq and Afghanistan.

U.S. Defense Contract Spending in Nominal DollarsU.S. Defense Contract Spending in Nominal Dollars

The impact of defense contract spending cuts has been and will continue to be uneven across regions and states. This analysis shows which metropolitan statistical areas (MSAs) have been most impacted by defense contract spending cuts. At the aggregate level, some of the largest MSAs have seen the most dramatic cuts from fiscal year 2009—the peak nationally of DoD contract spending—to fiscal year 2015, which is the most recent fiscal year of data available. On a per capita basis, however, the 10 largest declines in defense contract spending were experienced in MSAs with populations of less than 500,000.

While the Washington, D.C. MSA—home to the headquarters of several large defense contractors including Lockheed Martin, General Dynamics, and Northrop Grumman—experienced the largest drop in defense contract spending ($6.5 billion) from FY 2009 to 2015, on a per capita basis the decline was only $1,072; this was the 31st largest per capita decline in defense contract spending among the MSAs. Defense contract spending fell $2.3 billion in the New York metropolitan area from FY 2009 to 2015; this, however, only represented a loss of $116 on a per capita basis.

In contrast, a $2.3 billion decline in the Oshkosh MSA represented a loss of $13,378 per person, the largest per capita decline among all MSAs over this period. The Oshkosh MSA is home to the Oshkosh Corporation, a military vehicle manufacturer, which has reduced its workforce in response to declining defense contract spending.

From FY 2009 to 2015, defense contract spending decreased by $301.9 million or $2,891 per capita in the Lima, Ohio MSA; the Joint Systems Manufacturing Center, a government-owned, contractor-operated tank production facility in Lima operated by General Dynamics Land Systems, has experienced a production hiatus as the Army shifts production from the M1A2 Abrams fleet to the M1A3.      

The labor market impact of defense contract spending cuts can vary widely depending on the type and nature of the defense contract spending. Every industry in the area will have a different economic impact based on the size of its local supply chain and the spending spillover from its directly employed workers. It stands to reason, however, that these spending cuts, as steep as they are, can be a driving force to upset labor markets in many of the nation’s MSAs, both large and small.

Defense Contract Cuts by MSA, FY 2009 to 2015
MSA Total Defense Contract Cuts FY 2009 to 2015
Washington-Arlington-Alexandria, DC-VA-MD-WV MSA -$6,534,964,135
Phoenix-Mesa-Scottsdale, AZ MSA -$4,540,569,745
Los Angeles-Long Beach-Anaheim, CA MSA -$4,334,692,207
Detroit-Warren-Dearborn, MI MSA -$2,930,431,025
New York-Newark-Jersey City, NY-NJ-PA MSA -$2,338,177,154
Oshkosh-Neenah, WI MSA -$2,268,233,215
Chicago-Naperville-Elgin, IL-IN-WI MSA -$2,238,919,430
New Orleans-Metairie, LA MSA -$2,159,563,955
York-Hanover, PA MSA -$2,016,694,563
Boston-Cambridge-Newton, MA-NH MSA -$1,779,815,870
Louisville/Jefferson County, KY-IN MSA -$1,717,377,395
Cincinnati, OH-KY-IN MSA -$1,664,995,187
Memphis, TN-MS-AR MSA -$1,620,314,173
Houston-The Woodlands-Sugar Land, TX MSA -$1,488,712,685
San Antonio-New Braunfels, TX MSA -$1,391,688,781
Hartford-West Hartford-East Hartford, CT MSA -$1,359,347,332
South Bend-Mishawaka, IN-MI MSA -$1,140,970,964
El Paso, TX MSA -$1,112,974,753
Bellingham, WA MSA -$966,597,640
Charleston-North Charleston, SC MSA -$910,442,557

 

Defense Contract Cuts per Capita by MSA, FY 2009 to 2015
MSATotal Defense Contract Cuts FY 2009 to 2015$ Cut per Capita
Oshkosh-Neenah, WI MSA -$2,268,233,215 -$13,378
York-Hanover, PA MSA -$2,016,694,563 -$4,554
Bellingham, WA MSA -$966,597,640 -$4,553
South Bend-Mishawaka, IN-MI MSA -$1,140,970,964 -$3,564
Lima, OH MSA -$301,908,063 -$2,891
Crestview-Fort Walton Beach-Destin, FL MSA -$725,869,109 -$2,769
Watertown-Fort Drum, NY MSA -$300,052,222 -$2,551
Anniston-Oxford-Jacksonville, AL MSA -$287,665,595 -$2,488
Fort Wayne, IN MSA -$852,247,912 -$1,983
California-Lexington Park, MD MSA -$213,631,915 -$1,917
New Orleans-Metairie, LA MSA -$2,159,563,955 -$1,710
Anchorage, AK MSA -$591,040,245 -$1,478
Sioux City, IA-NE-SD MSA -$248,450,379 -$1,470
Roanoke, VA MSA -$450,132,483 -$1,431
Louisville/Jefferson County, KY-IN MSA -$1,717,377,395 -$1,343
El Paso, TX MSA -$1,112,974,753 -$1,327
Binghamton, NY MSA -$323,305,058 -$1,314
Columbus, GA-AL MSA -$410,919,789 -$1,310
Bangor, ME MSA -$192,447,838 -$1,260
Palm Bay-Melbourne-Titusville, FL MSA -$713,521,119 -$1,256

 

Defense Contract Gains by MSA, FY 2009 to 2015
MSA Total Defense Contract Gains FY 2009 to 2015
Minneapolis-St. Paul-Bloomington, MN-WI MSA $2,003,699,292
Seattle-Tacoma-Bellevue, WA MSA $1,713,789,488
Baltimore-Columbia-Towson, MD MSA $1,054,626,982
Bridgeport-Stamford-Norwalk, CT MSA $803,582,514
Pittsburgh, PA MSA $803,508,009
Norwich-New London, CT MSA $777,377,637
Mobile, AL MSA $679,625,713
Portland-South Portland, ME MSA $575,384,923
Amarillo, TX MSA $513,600,860
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD MSA $415,749,550

 

Defense Contract Gains per Capita by MSA, FY 2009 to 2015
MSA Federal Contract Gains 2009 to 2015 $ Gains Per Capita
Norwich-New London, CT MSA $777,377,637 $2,859
Pittsfield, MA MSA $301,455,515 $2,358
Amarillo, TX MSA $513,600,860 $1,960
Mobile, AL MSA $679,625,713 $1,636
Lynchburg, VA MSA $326,223,707 $1,255
Portland-South Portland, ME MSA $575,384,923 $1,093
Pine Bluff, AR MSA $85,602,563 $914
Bridgeport-Stamford-Norwalk, CT MSA $803,582,514 $848
Idaho Falls, ID MSA $91,296,319 $653
Minneapolis-St. Paul-Bloomington, MN-WI MSA $2,003,699,292 $568
Source: Chmura Economics & Analytics and U.S. Census Bureau
Note: July 2015 population estimates used to calculate cuts and gains per capita.

 

[1] The U.S. federal government’s fiscal year begins on October 1 of the previous calendar year and ends on September 30. For example, FY 2001 began October 1, 2000 and ended September 30, 2001.

[2] FedSpendTOP data are derived from USASpending.gov data but provide a more accurate picture of federal spending based on the time and place of performance when compared with published federal awards data. The data are adjusted for the length of the contract as well as for an associated subcontract’s place of performance (i.e., regional spending is based on place of performance with out-of-region awards subcontracted into the area added in and in region awards subcontracted out of the region subtracted out); FedSpendTOP data also include purchases by non-DoD agencies which end up in DoD products and have been corrected for errors identified during Chmura’s quality control process.

[3] In nominal dollars (i.e., not adjusted for inflation).

Creating Strategic Plans for Workforce Development

Identifying occupations that are needed by businesses in a region is a precursor to the creation of a workforce development strategic plan. Moreover, identifying occupations that are currently in demand and those that will be needed over the next decade enables institutions in a region to better align their resources in workforce and education to meet the needs of businesses. Knowing which occupations are now in-demand and expected to remain in-demand over the next decade also empowers residents or communities to obtain the skills to compete for those jobs and to obtain living wages.

Click here to read Virginia’s Combined State Plan for WIOA (Chmura Economics & Analytics supported the development of the plan):

http://www.elevatevirginia.org/state-plan/