It is easy to forget the picture of long-term economic growth given today's turbulent markets. In 1925, the U.S. gross domestic product was $90.6 billion. By 2009, the GDP had grown to $14.3 trillion. This equates to a staggering 157-fold increase as a 6.2% annual average growth compounded over 84 years (see the following graph). Even the Great Depression appears as a transitory drop in this economic ascent while the -1.3% decline in 2009 barely registers. Today, there are 25 U.S. corporations that have market capitalizations in excess of the GDP in 1925.
GDP growth was driven by three factors – inflation, labour force growth and productivity improvements. Although inflation of 2.8% per annum was a significant part of the 6.2% annual GDP growth, labour force and productivity increases accounted for the bulk of economic growth. Real GDP per capita, the most relevant measure of economic prosperity and a rough proxy for productivity, grew at 2.1% annually.
Ever-increasing corporate productivity fostered by competitive, open markets is the engine of long-term real wealth creation. Investors' returns from dividends and capital appreciation reflect the growth in corporate earnings as rising prices, an expanding population and labour force, and productivity improvements lift GDP.
