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Has weather clouded readings on this week’s important releases?

Part 5
Has weather clouded readings on this week’s important releases? (Part 5 of 10)

Why lower consumption affected the 2nd economic growth estimate

GDP

The Bureau of Economic Analysis released the second estimate for 2013 and fourth quarter GDP on Friday, February 28. The estimate is based on more complete data and it overrode the preliminary release on January 30. Real gross domestic product (or GDP) increased 1.9% in 2013 year-on-year, compared to an increase of 2.8% in 2012.

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Quarter-on-quarter real GDP growth in the fourth quarter of 2013 was revised from 3.2% in the advanced estimate to 2.4% in the second estimate. Current-dollar GDP was revised from 4.6% in the advanced estimate to 4% in the second estimate. This change was due to the increase in personal consumption expenditure (or PCE) and exports coming in smaller than initial estimates. The price index for gross domestic purchases increased 1.2% in 2013, compared with an increase of 1.7% in 2012.

What is gross domestic product (or GDP)?

The GDP of a country is the total market value of all final goods and services produced within a country within a specified timeframe, like a quarter or a year. Encompassing all sectors of the economy, it’s one of the broadest measures of the economic size or health of a country. Very broadly:

GDP = Total Consumption + Total Investment + Government Expenditure + (Exports – Imports)

What did the estimate for 2013 GDP indicate?

Real GDP increased 1.9% in 2013 year-on-year, compared to an increase of 2.8% in 2012. This increase was primarily due to increases in personal consumption expenditures, exports, residential and non-residential fixed investment, and private inventory investment that were partly offset by a negative contribution from federal government spending and an increase in imports.

The pace of growth in real GDP slowed in 2013, primarily due to deceleration in non-residential fixed investment, a larger decrease in federal government spending, and decelerations in personal consumption expenditures and exports that were partly offset by a deceleration in imports and a smaller decrease in state and local government spending.

The Bureau will release a third estimate for fourth quarter and 2013 GDP on March 27.

How does the GDP impact debt markets?

An increase in real GDP implies that the economy is expanding. Other factors remaining constant, when the economy is expanding, demand for money is higher because investors are eager to commence new ventures due to positive underlying business sentiment. The increase in demand for funding tends to raise interest rates, lowering bond prices and ultimately implying costlier debt. A decrease in GDP would imply the opposite.

Further, an increase in real GDP would imply that the Fed may discontinue its monthly bond purchases ($65 billion per month currently)—that is, it will continue with the taper. This would mean tighter liquidity, higher interest rates, and lower bond prices. A decline in real GDP would imply the opposite.

To read about other indicators that will significantly impact future interest rates, move on to Part 6 of this series.

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