Gross domestic product
Gross domestic product (or GDP) is an all-inclusive measure of economic activity. It encompasses every sector of the economy. The GDP of a country is a measure of the output of goods and services produced by labor and property located in that country.
More specifically, 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.
Real GDP is nominal GDP adjusted for inflation. The adjustment made to the nominal GDP for price changes (or inflation) facilitates a comparison between two periods.
What does the current GDP reading say?
The Bureau of Economic Analysis, U.S. Department of Commerce, released its advance estimate of second quarter GDP on Wednesday, July 30. Accordingly, the real GDP increased at a seasonally adjusted annual rate of 4% in the second quarter this year.
Compared with the 2.1% decline in GDP in the previous quarter and the 3.1% consensus expectations for this quarter, this reading highlights the more-than-expected rebound from the adverse weather–affected first quarter. Extreme winter weather conditions during the first two months of the year affected production and, in turn, GDP in the previous quarter.
On the components front, inventory investment jumped $93.4 billion after rising $35.2 billion in the first quarter. Personal spending posted a robust 6.2% gain, following a 1% rise in the prior quarter. It was boosted by increased spending on durables. Residential investment rebounded. Meanwhile, non-residential investment reported healthy growth once again. Government purchases were slightly up, while net exports worsened notably.
The Bureau of Economic Analysis is expected to release its second estimate for the second quarter GDP by Thursday, August 28, 2014.
The GDP report contains a treasure trove of information that not only paints an image of the overall economy but also tells investors about important trends within the big picture. GDP components like consumer spending, business and residential investment, and price (inflation) indexes give you important clues with respect to the direction of the economy. These clues can translate to investment opportunities and guidance in managing a portfolio.
A significant change in GDP, whether up or down, usually has a significant effect on the stock market. A bad economy usually means lower profits for companies, which in turn means lower stock prices. A growing economy leads to higher consumption and, in turn, growing corporate profitability and sales. This, in turn, drives up equity indices like the SPDR S&P 500 ETF (SPY), the iShares Core S&P 500 ETF (IVV), and the Total Stock Market ETF (VTI). These ETFs track large-cap equities of companies like Apple Inc. (AAPL) and Exxon Mobil Corp. (XOM) up.
Bond investors are highly sensitive to inflation. Robust economic activity could pave the road to inflation.
Let’s move on to see why construction spending fell unexpectedly in June.