Gross Domestic Product is the standard measure, in dollars, of the level of production in the economy. Production is essential, as it's wealth creation (when measured properly); more efficient production creates wealth and raises the standard of living. Every other economic variable is only important as it relates to production.

For example, we only care about price inflation insofar as it affects our wealth. Lower prices can actually be the result of more efficient production; our Federal Reserve tries to convince us that lower prices are bad only when an economy is over-levered, as any good central bank left alone will eventually accomplish.

The objective of capitalism is to ruthlessly increase production. The objective of socialism is to take the current standard of living and spread it equally among an economy's population.

GDP is the sum of consumption, investment, government spending, and net exports. in valuing assets such as stocks, we need to understand not just whether or not the economy is currently expanding, as indicated by GDP, but how and why. Current GDP has been shrinking and is currently $11.5 trillion.

Current consumption, which at $8.2 trillion is around 70% of GDP, has fallen $150 billion from last year. If you exclude gasoline purchases from today’s numbers, retail sales fell by a record amount over last year. Consumers are spending more of their disposable income on non-discretionary goods and trying to save more money: the savings rate bottomed last year and has been rising. It will continue to rise as consumers must mend their balance sheets. If you take consumer debt divided by disposable income, it's still 130% (reported today), an all-time high. Consumers are in shabby shape.

Investment, which represents things like building factories, is $1.3 trillion or 11% of GDP, and down 23.3% from last year.

We all know the status of net exports, which is and has been negative to the current tune of $350 billion a year or a drag of 3% on GDP.

In order to compensate, the government has stepped in with massive spending of $2.2 trillion or almost 20% of GDP. Where they get the “money” for this I've discussed many times. Our public debt could one day soon surpass those kings of inflation -- the Japanese. In addition to stimulus, the government has also “borrowed” to bailout directly or indirectly the financial system. This adds nothing to GDP but probably saves it from nose-diving via consumption and investment. Not many people know that if you add up all the bailouts, direct and indirect, it comes to $30 trillion. Truly mind-boggling numbers.

Government spending becoming such a large part of GDP is not good because it is the least productive of the other processes that drive production. The other processes are based on capitalism that have several stages where production is made more efficient. When a computer is made it is the culmination of many processes and parts, all of which are produced by specialists who make their processes the most efficient possible. They're rewarded with profit for doing so. The government doesn't have specialists and spends money mostly based on political considerations. The "capital" it spends is very inefficient towards production.