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.
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. So what is GDP, and should investors monitor it closely? 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.
"If you wonder why GDP is important or why people care, it’s because the data truly show productivity of the country and whether our economy is growing or sinking," said JJ Kinahan, Chief Market Strategist, TD Ameritrade. “That can help you to set long-term prospects for the equities or indices you invest in."
From a big-picture, macroeconomic standpoint, the GDP report is extremely influential. One thing to keep in mind, however, is that 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: GDP represents the “final score" for the U.S. economy each quarter, and many investors tend to closely watch the GDP growth rate to get a sense of economic health. “It absolutely matters because the market pays close attention to it," Kinahan said.
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."
The GDP formula breaks things down neatly into four categories:
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."
Speaking of the size of the economy, in 2018, GDP rose above $20 trillion for the first time (see figure 1).
Tradability rating: (a) Tends to be ignored. (b) Depends on overall trading climate. (c) Don’t miss this one.
Answer: 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.
Fed impact: Keep in mind that the U.S. Federal Reserve (Fed) watches GDP growth closely. A higher or lower than expected GDP number can sometimes play into the Fed’s rate decisions. Anyone wondering what is GDP and why to watch it probably should consider the possible Fed impact of the number. It’s potentially one big reason to keep an eye on GDP.
Consider watching: 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.
Compare and contrast: Economists often use GDP per capita as a way to compare economic growth between different countries. You might hear about this number in some articles about GDP, but it’s not really something Wall Street typically pays much attention to.
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