Economic Reports Primer, Pt 2: Gross Domestic Product (GDP)

Gross domestic product (GDP) data is key to understanding the health of the U.S. economy, but may not be so critical for stock market traders and investors.

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https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Scoops of all colors: The U.S. Gross Domestic Product report covers all kinds of economic indicators.
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When economists want to analyze whether the economy is expanding or slipping into a recession, they often turn to the U.S. gross domestic product (GDP) report. This massive bounty of data, the biggest and most comprehensive economic indicator, reveals the economy’s bottom line each quarter, measuring how much total output has increased or declined.

From a big-picture, macroeconomic standpoint, the GDP report is extremely influential, but from a trading standpoint, much less so. Why? The data series is a quarterly number, which means it’s somewhat old news by the time it comes out. Remember: markets are forward looking. But, there’s no getting around it, the GDP number represents the "final score" for the U.S. economy each quarter. Here's what you need to know.

Report name: Gross Domestic Product
Released by: U.S. Department of Commerce, Bureau of Economic Analysis
Release date:
Generally the fourth week of the month; day of the week can vary
Release time:
8:30 a.m. ET

Best trait: A lot of information all in one place. "This is the catch-all report," says Patrick O'Hare, chief market analyst at Briefing.com. "If you are an economist, the GDP report will provide messages for you in one fell swoop. It breaks things down neatly into four categories: (1) personal consumption expenditures; (2) gross private investment; (3) net exports (the difference between what the U.S. sells abroad and what it imports); and (4) a snapshot of government spending."

One weakness: It's old news. "It is a must-read for economists, but less so for equity traders," says O'Hare. "The U.S. economy is huge and it takes a while to get everything together. We don't get the advance estimate until a month into the next quarter. And, because of the size of the economy, you get two subsequent revisions. It is somewhat dated and that can reduce its [market] impact."

Tradability rating:
(a) Tends to be ignored. (b) Depends on overall trading climate. (c) Don't miss this one.

It depends. O'Hare rates this a 4 or 5 on a 1–10 scale. "The tradable impact is going to be proportional to the size of the surprise in the number itself," O'Hare says. After all, markets tend to "price in" pre-report estimates, and subsequent price reactions can be related to a report either under-delivering or over-delivering.

Current read: The third estimate revealed fourth-quarter 2015 GDP running at a 1.4% pace. That’s up from the advance estimate of 0.7% and the second estimate of 1.0%. "There is nothing special in this rate," O'Hare says. "Everyone keeps waiting for the economy to hit escape velocity, where it exceeds the potential growth rate around 3%. But the U.S. economy can't sustain growth over that rate." Recent quarters have shown a type of "see-saw" movement, with wide swings and jumps. Take a look at 2015: Q1 0.6%, Q2 3.9%, Q3 2.0%, Q4 1.4%.

"We are still not seeing everything translate over to strong GDP. There are no real animal spirits as it relates to consumer spending or business investment," O'Hare says.

Good tip: Interested investors can monitor a tool from the Federal Reserve Bank of Atlanta called GDPNow. Economists there developed a model to provide a forecast ahead of the official release date. "I pay close attention to this; they are doing a pretty good job of forecasting GDP," O'Hare says.

Mark your calendar: On May 27, the Bureau of Economic Analysis will release its second estimate of first-quarter 2016 GDP.

Check back next week as we take a look at the ISM Non-Manufacturing Index report.
Read part 1 on the non-farm payrolls report.

Next Step: See What the Fed Sees

Chart the historical performance of this report, or compare it against nearly 400,000 other economic data points – all inside your trading platform.

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