Gross domestic product (GDP) is a broad measure of the nation's economic activity. While calculating GDP is somewhat complicated, this measure generally reflects the size of the economy, and thus tracking its changes from one quarter to the next can provide an indication of the country's economic health. For small businesses, which are often sensitive to the economic climate, GDP can be an important measure of current business prospects.
Relationship Between GDP and Small Business
Because GDP measures overall economic output, small businesses may carefully watch GDP figures to determine how the economy is faring and how their own results compare with the results of other businesses. However, small-business results do not always track GDP figures. While small businesses account for roughly 50 percent of the private-sector GDP, in some cases the economy can grow while small businesses struggle, or vice versa.
If GDP stagnates or declines, it may be an indication to small businesses that there is not enough economic growth to ensure their continued profitability. Poor GDP figures may cause small businesses to anticipate a decline in sales, which can in turn lead them to reduce inventory, lower prices or hold off on plans for expansion to new product lines or locations. Likewise, a strong GDP may lead small-business owners to plan confidently for a bright future.
Investor and Bank Confidence
Regardless of how a small-business owner feels about her own business's prospects, others who have relationships with the business may have their own opinions about how the economy will fare. An investor in a retail business, for example, may think twice about investing more money when slow GDP growth indicates a poor retail climate. Banks, which loan money to many small businesses, may increase lending limits when GDP figures predict a rosy sales picture.
With respect to employees, negative GDP figures may be a mixed blessing for employers. While economic growth can lead to increased sales and a need for more employees to help manage a growing business, quality workers can be difficult to find in a tight labor market. Meanwhile, while the economy is struggling, employers may have a larger pool of prospective hires from which to choose, and can potentially be stingier in terms of pay and benefits.