Last week, GDP numbers were released showing that the economy expanded at an annual rate of 3.2% in the 4^th quarter. This follows an expansion of 4.1% in the 3^rd quarter. Overall, the last 6 months of the year show an economy expanding at its best rate since 2003. In fact, the numbers are so good that the Fed is continuing to unwind the extraordinary measures that it put in place after the financial crisis to prop up the economy. Although this is certainly good news, one is still left with the sense that there is still something wrong with the economy in spite of the numbers.

One must take note that while the unemployment rate recently dropped to 6.7%, this was largely due to people leaving the labor force. Since 2008, America’s GDP has increased by $1.7 trillion dollars (12.34%) and yet the number of people employed has increased by only 7.5%. While about 10 million more people are employed today than was the case in 2008, the American population has expanded by 12 million. While this might seem okay, consider that there are roughly 2 million fewer people in the labor force now than when the population was 12 million less. This situation points to an extraordinary pool of discouraged workers who have dropped out of the labor force.

What all of this implies is that the GDP statistic as a measure of national prosperity appears to perhaps be reaching some limits. In the post-war period, rising GDP numbers pointed to broadly rising prosperity for most Americans. Today, while a rising GDP number is better than a falling one, it doesn’t necessarily mean what it once did. In earlier generations, rising GDP may have been more visible to most people. A recent poll revealed that 74% of Americans think that the U.S. is still in a recession. This is incredible!! What would cause a result such as this? It can’t be that these folks are looking at their investments and drawing this conclusion as the stock market has been on a tear over the last year. It certainly can’t be that 74% of Americans are listening to Republicans and conservative media outlets describing how terrible the economy is. The only thing that can truly explain a number like this (barring an epically inaccurate poll) is that what 74% Americans are seeing in their own lives and in the lives of people that they know is more consistent with a recession than with an expansion (even an anemic one).

If true, the political usefulness of the GDP statistic may be different going forward than has traditionally been the case. While a rising tide in the post-war period did traditionally lift all boats, that general rule may no longer apply. If so, while the GDP statistic may continue to be useful for stock market investors and others, it may no longer be useful as a gage of prosperity for a broad swath of the population. New measures will have to be found.