GDP shows steady growth

Recession? What recession? The economy seems to be trudging along at a healthy pace, judging by a recent GDP report, which sent markets soaring.

Gross domestic product – a measure of the economy’s output – grew at a 3.3 percent annualized rate in the second quarter. Not bad at all, considering the daily barrage of news about soaring bankruptcies, tumbling home prices and never-ending inflation.

But the growth was largely driven by factors that either won’t be sticking around for long or that come with nasty side effects. Powering the GDP growth was a surge in exports – a gain of 13.2 percent – fueled by a weak dollar, which made our goods and services look cheap to foreign markets.

The second economic jolt for the quarter came from a combo of annual tax rebates and stimulus checks, proving only that when the government sends someone a check, they’ll spend it.

Unfortunately, a cruel consequence of both a weak dollar and a flood of stimulus checks is a nasty dose of inflation, which affects our real wages. From 2000 to 2007, real wages fell by $2,000 for the average middle-class family. In short, whatever economic growth came along during that period didn’t find its way into the average citizen’s pockets. Serenity now!

Ask the Fool

Q: Are bonds or bond mutual funds better? – L.W., Denton, Texas

A: First off, understand that long-term money is likely to grow more quickly in the stock market than bonds. But if you’re seeking some traditional conservative investments, read on.

With traditional bonds, you buy them for a fixed amount, and the interest rate tells you exactly how much you can expect to receive. If a $10,000 bond pays 6 percent over 10 years, you’ll receive $600 each year over that period. (Then you’ll get your $10,000 back.)

Meanwhile, bond mutual funds, often called “fixed-income” funds, typically pay monthly dividends. You may invest $10,000 in one such fund that sports a dividend yield of 6 percent, but that amount will fluctuate with interest rate changes and as the fund manager buys and sells various bonds using his judgment.

Bond funds offer instant diversification, but individual bonds permit you to plan your financial future more precisely. Learn more at www.bondsonline.com/asp/research /bondfunds.asp and get additional retirement guidance at www.fool.com/retirement.htm.

Q: Can I reduce my capital gains tax by realizing gains in a year when my income is less than normal, or is the tax the same regardless of my income? – T.G., St. Louis

A: The tax will be the same, 15 percent for long-term gains, unless your income is so low that you’re in the 10 or 15 percent tax bracket. Then your long-term gain rate can be as low as zero. Short-term gains are taxed at your ordinary income tax rate. If you have capital losses, you can offset your gains with them. Learn more at www.fool.com/taxes.

My smartest investment

Back in the early 1960s, I bought shares of Toyota Motors, as ADRs. I bought 100 shares for $112, or $1.12 each. I didn’t keep up with it too often, but in 1989, I noticed it listed in a newspaper at $45 per share. By the time the shares were eventually sold in 2001, for about $65 apiece, I had more than 250 of them, due to stock splits. Oh, and I also received dividends for almost 40 years. – Helen R., Fairfield, Calif.

The Fool Responds: Great job, Helen! You made a profit of more than $16,000 on your $112 investment, and that doesn’t even include dividends! Your story is a great example of how we can build great wealth by investing in healthy and growing companies and hanging on for the long term. We shouldn’t hold blindly, though, as sometimes even great companies can face insurmountable problems. American Depositary Receipts (ADRs), by the way, make it possible for us to easily invest in foreign companies with our U.S. dollars, via our brokerages.