So, it turns out the Australian economy contracted, slightly, during the three months to the end of September this year. Cue the pollies, blaming the other side, and telling us that only their side has the answer to the problem. And, surprise, surprise, the solutions they've come up with just happen to gel perfectly with their already-held ideological positions and party platforms.
It would be funny if it wasn't serious -- after all, the prize for getting it right is national prosperity and jobs -- something I think almost all of us can agree are good things.
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Economy goes backward
GDP contracted 0.5 per cent in the September quarter. The Treasurer points the finger at weak business investment.
A second quarter of negative growth (which, as an oxymoron, is the economic-jargon-based equivalent of backward progress)Â would meet the generally accepted definition of a recession -- not that the pollies will utter that fateful word for fear of being branded with it.
Now, most economists expect the December quarter to be positive, thus avoiding such a fate. But then, they expected the last quarter to be positive, too… so take it with a grain of salt.
As someone who works in the finance industry, you might be surprised to hear me say that we obsess way too much over such economic indicators. Yes, they're important as signposts for bureaucrats and policy-makers, but increasing numbers of Australians are treating them as something akin to sport scores. And in that lies a significant risk: the self-fulfilling prophecy.
Let's say you're thinking about buying a new washing machine or mobile phone. You see that the economy is weak, so you decide to put off the purchase. Let's say a decent number of your fellow Australians do the same. The result? Spending falls.
Employers, reading the tea leaves, stop hiring, leading to slow or negative jobs growth (there's that 'negative growth' again). Fewer jobs means less spending, which means fewer jobs… You can see where this is going.
Just what does it measure?
But here's the bigger issue. Most of us don't really understand GDP at all. Yes, it's a measure of the 'stuff' we make and do, but here's a simple example: Cyclone Yasi hit Queensland in 2011, causing $3.5 billion worth of damage. If that amount was actually spent in the rebuilding effort, Australia's GDP would have increased by precisely the same amount.
![GDP data is far from perfect, especially if you're aiming to capture the impact of the economy on actual people.](/web/20161211032000im_/http://www.theage.com.au/content/dam/images/g/t/7/x/f/9/image.related.articleLeadwide.620x349.gt7wxx.png/1481375068857.jpg)
In other words, the cyclone was actually good -- according to the statisticians -- for the Australian economy. We can add car accidents, house fires and all manner of other destructive or negative events to that list.
And here's another one. Over the past few months, many economists and commentators have commented on the boost that global GDP will get from higher oil prices. And they're right. The more we spend on petrol at the bowser, the larger our economic pie will be, all else being equal.
![How much better off do you feel when a tank full of juice costs $1.60 per litre, compared to $1.20?](/web/20161211032000im_/http://www.theage.com.au/content/dam/images/g/s/d/c/7/u/image.related.articleLeadwide.620x349.gt7wxx.png/1481375068857.jpg)
But let me ask you: how much better off do you feel when a tank full of juice costs $1.60 per litre, compared to $1.20? If your answer is that you feel much better, I'm happy to sell you as much petrol for $2 per litre as I can find.
Lastly, how is the pie shared? Is growth distributed evenly between an economy's citizens? And looking at it less ideologically, what is the GDP per capita? Because if the headline figure grows more slowly than population, then the per capita figure is negative. An important distinction.
Welcome to reality
My intention isn't to take the economists or statisticians to task -- trying to measure an economy's output is a tough job, and there is actually an established long-term correlation between GDP and jobs (though some recent research is questioning whether too high a share of growth is bypassing jobs and going straight to company coffers).
Nor am I downplaying the apparent weakness in the Australian economy. We've been almost impossibly lucky to have had a mining boom, and then to be able to weather the mining slowdown without tipping into recession. Though no-one under 40 can actually remember a recession in their working lives, one will come at some stage. The question is when.
And, though Paul Keating still gets flack for his 'recession we had to have' comment, he was right, at least in direction. Too much of a good thing leads to irrational exuberance, which sows the seeds of the next downturn. So moderation is required if we are to avoid serious economic consequences.
Foolish takeaway
GDP might well be the least bad of all the flawed ways in which we can measure the health of our economy. But it's far from perfect, especially if you're aiming to capture the impact of the economy on people. Which, let's be frank, should really be the idea.
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Scott Phillips is the Motley Fool's director of research. You can follow Scott on Twitter @TMFScottP. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under​ AFSL 400691).
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