12) Economic Indicators: Gross Domestic Product (GDP)

by · October 16, 2010

What It Is

GDP or gross domestic product is arguably the most important economic indicator to date. It covers basically everything that has influence in the movement of the economy, such as government purchases, consumer spending, and construction costs that are already paid in. It also includes trade balance wherein imports are deducted into the figure while the exports are added. GDP is prepared by the Bureau of Economic Analysis and is released every quarter or four weeks after the last month of the quarter. It thus covers the last three months that make up the quarter. There’s also a final release, which is at three months after the quarter ends.

Basic Information

GDP is the total market value of the services and goods that are produced during a specific time period. It is presented in an annualized percentage, with net of inflation and changes in prices. This is to come up with only real data sets.

Since there are a lot of components that are included in the GDP, you can expect it to be very thorough and detailed. The volume of information may also be the reason why it is released quarterly. Some of the important components that investors should look into include wholesale inventories, personal consumption, and retail sales. The report also has a Real GDP Quantity Indexes, which gather all the chain-weighted indexes of other reports. The current base is pegged at 2000.

The report also includes U.S. imports and exports, presented as a current account deficit, or the difference between both of them. The country has been in a trade deficit for quite some time now, meaning there are more imports than exports. You can also read about GNP or gross national product, which covers goods and services produced by property and labor.

How the Report Is Valuable

Since GDP covers almost everything having to do with economic activity, it is the most important indicator when it comes to economic health. Perhaps unsuprisingly, the data found in the GDP can have a huge impact on the way people and investors will do business.

Real GDP—which is also called inflation-corrected GDP, constant dollar GDP, or constant price—is the value of goods and services with adjustments due to inflation. This one has benchmark, which is between 2.5 and 3.5 percent growth. This is the ideal growth, as it can mean that there are enough jobs to increase consumer consumption and profit for businesses. When the economy is doing well, the real GDP can double or even go as high as 8 percent. However, this is not considered a long-term trend, and thus many investors would just hope for 3 percent. If there is negative growth of GDP for two succeeding quarters, the country is said to be in recession.

Equity investors can take a look at the inventory and corporate profits on the report to have a good idea of the real growth of the GDP in a specific period. The latter is composed of operating cash flows, profits before tax, and main sector breakdowns.

To make the report easier to digest, BEA will also include their own comments or analyses, which are available in several pages. Investors can use the data analysis for each of the industry.

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