US: GDP


Fri May 29 07:30:00 CDT 2015

Consensus Consensus Range Actual Previous
Real GDP - Q/Q change - SAAR -0.8% -1.0% to -0.2% -0.7% 0.2%
GDP price index - Q/Q change - SAAR -0.1% -0.1% to -0.1% -0.1% -0.1%

Highlights
First-quarter GDP was revised down about as expected, to minus 0.7 percent vs expectations for minus 0.8 and compared with an initial reading of plus 0.2 percent. Updated source data made for a bigger negative contribution from net exports as imports spiked 5.6 percent from an initial gain of 1.8 percent. The change here is tied to the port strike and the sudden unloading of imports in March. A lower estimate for inventory growth was also a negative. Turning to demand, final sales were revised downward to minus 1.1 percent from minus 0.5 percent.

On the positive side, the contribution from residential fixed investment rose to 5.0 percent from 1.3 percent while the negative contribution from business spending improved 6 tenths to minus 2.8 percent.

The first quarter was definitely weak, showing the first contraction since first-quarter 2014 when GDP fell 2.1 percent in another winter quarter affected by unusually severe weather. The Fed itself has been noting the risk that the pattern of first quarter weakness could reflect how the numbers are crunched by government statisticians to account for seasonal variations. This process may have exaggerated the underlying weakness in the quarter.

Where is GDP currently tracking? Early estimates were in the 3.0 percent range but, due to weak consumer spending, have been slipping to the 2.0 percent range.

Market Consensus Before Announcement
First-quarter GDP is expected to move from an initial reading of plus 0.2 percent to a contractionary minus 0.8 percent. To blame is a wider-than-expected trade gap, the result of that quarter's port slowdown. Lower growth in inventories and nonresidential fixed investment are also cited.

Definition
GDP represents the total value of the country's production during the period and consists of the purchases of domestically-produced goods and services by individuals, businesses, foreigners and government entities. Data are available in nominal and real (inflation-adjusted) dollars, as well as in index form. Economists and market players always monitor the real growth rates generated by the GDP quantity index or the real dollar value. The quantity index measures inflation-adjusted activity, but we are more accustomed to looking at dollar values.

Individuals purchase personal consumption expenditures -- durable goods (such as furniture and cars), nondurable goods (such as clothing and food) and services (such as banking, education and transportation).

Private housing purchases are classified as residential investment. Businesses invest in nonresidential structures, durable equipment and computer software. Inventories at all stages of production are counted as investment. Only inventory changes, not levels, are added to GDP.

Net exports equal the sum of exports less imports. Exports are the purchases by foreigners of goods and services produced in the United States. Imports represent domestic purchases of foreign-produced goods and services and must be deducted from the calculation of GDP.

Government purchases of goods and services are the compensation of government employees and purchases from businesses and abroad. Data show the portion attributed to consumption and investment. Government outlays for transfer payments or interest payments are not included in GDP.

The GDP price index is a comprehensive indicator of inflation. It is typically lower than the consumer price index because investment goods (which are in the GDP price index but not the CPI) tend have lower rates of inflation than consumer goods and services.






Description
GDP is the all-inclusive measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. Investors in the stock market like to see healthy economic growth because robust business activity translates to higher corporate profits. Bond investors are more highly sensitive to inflation and robust economic activity could potentially pave the road to inflation. By tracking economic data such as GDP, investors will know what the economic backdrop is for these markets and their portfolios.

The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.

Importance
Gross domestic product is the country's most comprehensive economic scorecard.

Interpretation
When gross domestic product expands more (less) rapidly that its potential, bond prices fall (rise). Healthy GDP growth usually translates into strong corporate earnings, which bode well for the stock market.

The four major categories of GDP -- personal consumption expenditures, investment, net exports and government -- all reveal important information about the economy and should be monitored separately. One can thus determine the strengths and weaknesses of the economy in order to assess alternatives and make appropriate financial investment decisions.

Economists and financial market participants monitor final sales -- GDP less the change in business inventories. When final sales are growing faster than inventories, this points to increases in production in months ahead. Conversely, when final sales are growing more slowly than inventories, they signal a slowdown in production.

It is useful to distinguish between private demand versus growth in government expenditures. Market players discount growth in the government sector because it depends on fiscal policy rather than economic conditions.

Market participants view increased expenditures on investment favorably because they expand the productive capacity of the country. This means that we can produce more without inciting inflationary pressures.

Net exports are a drag on total GDP because the United States regularly imports more than it exports, that is, net exports are in deficit. When the net export deficit becomes less negative, it adds to growth because a smaller amount is subtracted from GDP. When the deficit widens, it subtracts even more from GDP.

Gross domestic product is subject to some quarterly volatility, so it is appropriate to follow year-over-year percent changes, to smooth out this variation.