US: GDP


Wed Nov 29 07:30:00 CST 2017

Consensus Consensus Range Actual Previous
Real GDP - Q/Q change - SAAR 3.3% 2.8% to 3.5% 3.3% 3.0%
GDP price index - Q/Q change - SAAR 2.2% 2.1% to 2.2% 2.1% 2.2%
Real Consumer Spending – Q/Q change – SAAR 2.5% 2.4% to 3.0% 2.3% 2.4%
Real Govt Spending - Q/Q change - SAAR 0.4% -0.1%

Highlights
Third-quarter GDP proved even more solid than the first estimate, revised 3 tenths higher in the second estimate to an as-expected 3.3 percent annualized rate. Nonresidential investment and inventory growth added a little more in the second estimate while residential investment and net exports subtracted a little less. These offset a slightly smaller contribution from consumer spending, at a 2.3 percent rate vs 2.4 percent in the first estimate and expectations for 2.5 percent. The drop off on the consumer side was centered in durables which, despite a slight downgrade, still grew at an 8.1 percent rate getting a boost from hurricane-replacement demand for autos.

Turning back to inventories, whether builds are actually positive or negative for the outlook are always difficult to assess, but given this year's general strength in consumer and business demand, the third-quarter build is probably a positive for the outlook, suggesting that businesses were stocking up for strength ahead including for the holiday shopping season.

Consumer spending, despite auto sales, wasn't on fire in the third quarter though the outlook for the fourth quarter, given what are very high expectations for holiday spending, are positive. Early expectations for fourth-quarter GDP are once again in the 3 percent range.

Market Consensus Before Announcement
The second estimate for third-quarter GDP is expected to come in at a 3.3 percent annualized rate vs 3.0 percent in the first estimate. Consumer spending is one of the expected pluses, seen at 2.5 percent vs the first estimate's 2.4 percent. The GDP price index is expected to remain unchanged at 2.2 percent.

Definition
Gross Domestic Product 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.

Household purchases are counted in 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 to have lower rates of inflation than consumer goods and services. Note that contributions of each component, as averaged over the prior year, are tracked in the table below (components do not exactly sum to total due to chain-weighted methodology). Consumption expenditures, otherwise known as consumer spending, has over history been steadily making up an increasing share of GDP.





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.