|Real GDP - Q/Q change - SAAR||2.9%||1.9% to 3.5%||2.3%||-0.2%||0.6%|
|GDP price index - Q/Q change - SAAR||1.5%||-0.1% to 2.0%||2.0%||0.0%||0.1%|
GDP came in on the lower end of expectations in the second quarter, up 2.3 percent vs the Econoday consensus for 2.9 percent. The latest data include new data additions as well as revisions with the first quarter now in the positive column, at plus 0.6 percent vs minus 0.2 percent in the prior reading.
Final sales in the second quarter rose a respectable 2.4 vs minus 0.2 percent in the first quarter. Residential investment was very strong in the latest quarter at plus 6.6 percent while personal consumption, boosted by auto spending, rose 2.9 percent.
On the minus side was business spending as nonresidential fixed investment fell 0.6 percent. Also on the minus side was federal spending which fell 1.1 percent reflecting a 1.5 percent decrease for defense. Net exports added slightly to the second quarter after pulling down the first quarter on the port strike. Inventory contribution was fractionally lower in the latest quarter.
Price data show some pressure with the GDP price index at plus 2.0 percent and the core rate, at plus 1.8 percent, very near the Fed's general 2 percent target.
Revisions had no effect on last year's GDP which is unchanged at plus 2.4 percent but it did shave 2013 to 1.5 percent from 2.2 percent. GDP for 2012 is revised down 1 tenth to 2.2 percent. The average from 2011 to 2014 is only 2.0 percent after revision, a fact that makes the latest quarter's 2.3 percent rate look even more respectable.
A new quarterly aggregate, the average of GDP and GDI, is a supplemental measure of growth that tracks in part total income of the economy and which rose 2.2 percent in the second quarter, right at the 2.3 percent GDP print. A new monthly statistic is international trade in goods which, aimed at reducing the size of GDP revisions tied to trade estimates, fell $62.3 billion in June vs a deficit of $59.8 billion in May. The June widening reflects a dip in exports and a rise in imports.
The second quarter wasn't that great, showing much less of a bounce from a weak first quarter compared to last year when GDP moved from a revised 0.9 percent decline in the first quarter to a 4.6 percent second-quarter surge. And this year's third quarter, deprived of momentum, doesn't look like it will match last year's third quarter when GDP rose a revised 4.3 percent.
Market Consensus Before Announcement
GDP is expected to rise 2.9 percent in the second quarter in what would be only a moderate bounce from the 0.2 percent contraction of the first quarter. Consumer spending is expected to show comparative strength in the second quarter along with residential investment. Exports, however, remain a trouble spot for the economy.
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.
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.
Gross domestic product is the country's most comprehensive economic scorecard.
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.