GDP - Gross Domestic Product

Gross Domestic Product

Gross Domestic Product is the total monetary value of all goods and services produced within a country. GDP does not include income from overseas investments and earnings.

Gross Domestic Product (GDP) is one of the largest headline figures, and it is considered a major indicator of a country’s economic health, and is one method of determining whether a region is in recession. Here, we examine GDP in more detail and consider its effects, and the effects of GDP-related data, on the markets. Since the US economy is the largest and most widely follow in the world, we have chosen to focus on US GDP, but the broad principles behind the data and its impact are the same for every market.

What is GDP?

US GDP measures the total output of goods and services from every producer in the US, whether they are foreign owned or locally owned (i.e. it is the sum total of everything produced within the US landmass).

GDP is “gross” because it does not include a deduction for the depreciation of capital goods.

It differs from Gross National Product (GNP) because GNP includes foreign earnings by US residents whereas GDP focuses solely on US output.

There are three measures of GDP in the US:

expenditure made, which represents the price of goods and services
income received, which measures the cost of producing goods and services
output produced, which represents the total physical volume of goods and services.

Expenditure and income-based GDP are calculated every quarter, but output-based GDP is an annual figure.

Financial markets are mainly concerned with the seasonally adjusted annualized percentage change in real expenditure-based GDP for the current quarter compared with the previous quarter.

This figure is based on actual market prices of good and services, adjusted for inflation.

GDP figures and commentary are published by the Bureau of Economic Analysis (BEA), part of the US government’s Department of Commerce (website: http://www.bea.doc.gov/). For each quarter, there is an advance, a revised and a final figure. The advance or flash figure is published on the last Friday of the first month after the quarter to which it refers; the preliminary report, or first revision, comes on the last Wednesday of the second month after the quarter; and the final version is published on the last Wednesday of the third month after the quarter. Most financial market attention is given to the advance report.

How accurate are the figures?

GDP basically pulls together the monthly reports for various sectors of the economy, so the data comes from a range of sources including government agencies, trade associations and businesses. Although much of this data has already been published by the time GDP is calculated, some of it is often missing when it comes to the first GDP report, so the advance report often contains assumptions made by the BEA about the missing data. As a result, there can be significant differences between the advance figure and the preliminary report, by which time more of the data will have become available. But the BEA also suggests whether the advance figure is likely to be revised up or down, which can give some indication of its confidence in the data.

Quarterly GDP estimates take account of seasonal adjustments such as weather, holidays and tax payment dates. The figures also take into account differences in the number of working days in each quarter.

Price indices that are applied to value estimates of nominal GDP to produce a more accurate or 'real' value of GDP.

As well as the straightforward GDP figures, the BEA also publishes GDP deflators. These show price changes for GDP and its components such as consumer products and capital goods. GDP deflators are a measure of inflation. They have been described as “the most comprehensive measures of price change available.”

How does GDP impact the financial markets?

Although GDP is certainly a useful figure for gauging just how well an economy is faring, financial market response to the release of GDP figures is usually fairly muted. This is because economists can often give traders a good idea of what GDP will be before it is published since most of its components come out before the main figure itself. So traders factor GDP estimates into their positions early. Markets will only react strongly to an unexpected advance GDP report.

Markets often react more noticeably to GDP deflators because they are more direct measures of inflation. Rises in GDP deflators, indicating accelerating inflation, often cause stock and bond prices to fall and the value of the dollar to decline whereas decreases in GDP deflators have the opposite effect.

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