Importance: ****
Definition: The gross domestic product(GDP) is the most important economic indicator. It represents a broadmeasure of economic activity and signals the direction of overall aggregateeconomic activity.
Related Indicators: GNP, PersonalIncome. The GDP report also includes inflation information in the formof data on a number of Price Deflatorsof GDP and its components.
Source: Department of Commerce,Bureau of Economic Analysis (BEA),NIPA dataset.
Frequency: The GDP report is publishedquarterly and revised monthly. The GDP for a given quarter is releasedin the first month following a quarter as the "advance estimate". The "preliminaryestimate" is published in the second month, followed by the "revised" estimatein the third month.
Availability: 3-4 weeks followingthe reported quarter
Direction: Pro-Cyclical
Timing: Coincident indicator ofthe business cycle
Volatility: Moderate
Likely Impact on Financial Markets:
- Interest Rates: Unexpectedly highquarterly GDP growth is perceived to be potentially inflationary if theeconomy is close to full capacity; this, in turn, causes bond prices todrop and yields and interest rates to rise. Also, higher than expectedGDP growth, i..e. good news about the economy, is bad news for the bondmarket because a strong report causes concern that the Fed might raisethe Fed Funds rate to avoid higher inflation. This is bearish for the fixedincome market.
- Stock Prices: Ambiguous. On oneside higher than expected growth leads to higher profits and that's goodfor the stock market. On te other, it may increase expected inflation andlead to higher interest rates that are bad for the stock market.
- Exchange Rates: Larger than expectedGDP growth will tend to appreciate the exchange rate as it is expectedto lead to higher interest rates.
Analysis of the indicator:
The five main components of the GDP are: (private)consumption, fixed investment, changein inventories, government purchases(i.e. government consumption), and net exports.
Traditionally, the U.S. economy's average growth rate has been between2.5% and 3.0%. This is why many economists believe that this range representsthe sustainable (or 'natural') long-run growth rate of potential output.Economic growth above this 'natural' growth rate cannot be sustained fortoo long: it can cause inflation and lead the Federal Reserve to increasethe Fed Funds rate to tighten monetary policy in order to slow growth andprevent a pickup in inflation. However, GDP growth in the U.S. economyin 1996-1997 has been on average above 3% leading some to question theconcept of a fixed 'natural' rate of growth. Trend increases in productivitygrowth or employment growth would lead to an increase in the sustainablerate of growth of GDP. See the pages on productivitycontroversies and NAIRU for more on thisdebate. An economic downturn, or negative growth for two consecutivequarters, is defined as a recession. During a recession, the Fed will tendto lower interest rates to stimulate the economy and increase the growthrate.
WEB Links
A Graph of the latest GDP data from TheEconomic Statistics Briefing Room of the White House
A table withthe most recent GDP data from the BEA
The latestGDP report from BEA
You can chart GDP and other NIPA data from the NIPAVISUALIZATION PAGE
You can see GDP charts with theEconomicChart Dispenser
You can create customized GDP Charts with the EconomicChart Maker Tip: type "GROSS DOMESTIC PRODUCT" in the Label sectionof the form and choose the transformation of the data you are interestedin.
An analysisof the GDP report from First Union
An Analysisof the GDP report from Morgan Stanley's Stephen Roach
GDP Accounting: GDP = C + I + G + NX (+ Residual)
Gross domestic product=
Personal consumption expenditures (C)+
Durable goods.........................
Nondurable goods......................
Services..............................
Gross private domestic investment(I) +
Fixed investment......................
Nonresidential......................
Structures........................
Producers' durable equipment......
Residential.........................
Change in business inventories........
Government consumption expendituresand +
gross investment(G)
Federal...............................
National defense....................
Nondefense..........................
State and local.......................
Net exports of goods and services(NX) +
Exports...............................
Goods...............................
Services............................
Imports...............................
Goods...............................
Services............................
Residual
A chart of the GDP growth from theMortgage Mart:
