What is Gross Domestic Product (GDP)?

Gross Domestic Product (GDP) is one of the most important and most talked-about data points in the trading month. Assessing the value of finished goods and services produced by a country over a fixed period of time gives great insight into the actual growth of an economy.

Generally, economic indicators can be categorized into three groups:

• Coincident indicators highlight the current state of the economy
• Leading indicators show where the economy is going
• Lagging indicators point out recent changes in economic activity as a whole

Despite being a lagging indicator, the GDP report is widely considered to be among the key measures of economic health and remains the most straightforward way to establish whether the economy is growing, contracting, or in a recession.

The GDP report has several components, and in order to interpret the data effectively, it is important to know which information is most market-moving.

Annualized GDP Reading

The Annualized GDP Reading, also known as the headline figure, is the number that the market will focus on first and foremost. As with any data point, it is useful to know what the surveyed analysts range of expectations are in order to gauge whether the number is in line with market consensus. Remember, the greater the deviation from the median expectation, the more likely it is that you will see a highly volatile reaction.

Revisions

The next most important figures are the revisions. GDP is subject to revisions on a regular basis due to the initial publication, referred to as the advanced or first reading. The first reading is released the first month following the quarter being defined and includes a number of data points, which are rough estimates. These estimated data points get revised each of the next two months as additional information becomes available, resulting in the release of the second and third (known as the final) GDP reading. 

Historically, the market tends to react most to the first release. By the time the final report is known, the figure has more or less been priced into the market. 

Personal Consumption Expenditures

Given the consumption and service-based nature of the U.S. economy as a whole, personal consumption expenditures (PCE) account for 68% of total Gross Domestic Product. Subsequently, PCE is another important variable to monitor when the data is released.

Conclusion

As you can see, there are a number of factors to think about when trading U.S. GDP, but with a little insight and preparation, this release is an event that can offer many trading opportunities.