Is the U.S. Economy Really Growing? Real vs. Nominal GDP Explained - Part 2

If you haven't read yesterday's blog post, please read it before continuing here.

Financial Engineering vs. Productive Growth

Another defining feature of the modern economy is financialization. Corporate buybacks increase earnings per share and support equity prices, but they do not directly expand productive capacity. Cheap credit inflates asset prices and boosts balance sheets, but it does not necessarily create durable increases in output. Low interest rates encourage borrowing and pull demand forward. Stimulus programs support consumption in the short term. Asset inflation creates a wealth effect. All of this contributes to nominal GDP. But none of it guarantees productivity gains. Since the 1980s, debt-to-GDP has trended steadily higher. Productivity growth, by contrast, has been far more uneven. That divergence matters. It suggests that a growing share of economic "expansion" may be financial rather than structural.

Real GDP Per Capita: The More Honest Measure

Total GDP can rise simply because the population rises. If ten million additional people join the economy, total output increases even if individual prosperity does not. That is why real GDP per capita is often the more honest metric. It attempts to measure output adjusted for inflation and divided by population.

In the post-World War II era, real GDP per capita rose strongly alongside productivity. In the 1990s, technological innovation drove another surge. But in the post-2008 period, real per capita growth has been more subdued relative to the scale of debt expansion and monetary intervention. When nominal GDP rises rapidly, but real per capita gains are modest, it suggests that rising prices and leverage are doing more work than productivity.

Has the Definition of Recession Changed?

For decades, many people relied on a simple rule of thumb: two consecutive quarters of negative real GDP meant a recession. Officially, recessions are determined by the National Bureau of Economic Research, which evaluates a broader set of indicators including employment, income, industrial production, and sales.

In 2022, the United States experienced two consecutive quarters of negative real GDP growth. Under the old rule of thumb, that would have qualified as a recession. But the NBER did not declare one, largely because employment remained strong and other measures did not confirm a broad-based downturn. Reasonable people can debate whether that was appropriate. Recessions are complex and do not always fit clean definitions. Still, it highlights an important point. Definitions evolve. Measurement evolves. Narrative evolves. And in a high-debt, high-stimulus environment, strong employment can coexist with weakening real output, at least temporarily. That blurs the line between expansion and contraction.

Nominal Strength, Structural Pressure

Since 2020, nominal GDP growth has been impressive. Fiscal stimulus combined with supply shocks pushed prices higher, and those higher prices flowed directly into GDP calculations. At the same time, federal debt surged to historic levels relative to GDP. Interest payments have become one of the fastest-growing components of the federal budget. If a growing share of national output is required to service past borrowing, flexibility diminishes. Policy choices narrow. Trade-offs intensify. The system may continue expanding in nominal terms. But structural pressure builds underneath.

So Is the U.S. Actually Growing?

The honest answer is yes, but the quality of growth matters. We are growing in dollar terms. We are expanding nominal GDP. We are producing more than we did decades ago. But the sustainability of that growth depends on whether productivity, innovation, and real per capita output are keeping pace with debt, financial engineering, and inflation.

Growth driven by productivity increases resilience. Growth driven primarily by leverage increases fragility. Understanding the difference between nominal and real GDP is not just academic. It shapes how we interpret headlines, how we assess policy, and how we evaluate risk in markets. When the economy grows because we produce more, that is prosperity. When it grows because we borrow more, that is leverage. The two are not the same.