Importance: ****

Definition: The gross domestic product (GDP) is the most important economic indicator. It represents a  broad measure of economic activity and signals the direction of overall aggregate economic activity.

Related Indicators: GNP, Personal Income. The GDP report also includes inflation information in the form of data on a number of Price Deflators of GDP and its components.

Source: Department of Commerce, Bureau of Economic Analysis (BEA), NIPA dataset.

Frequency: The GDP report is published quarterly and revised monthly. The GDP for a given quarter is released in the first month following a quarter as the "advance estimate". The "preliminary estimate" is published in the second month, followed by the "revised" estimate in the third month.

Availability: 3-4 weeks following the reported quarter

Direction: Pro-Cyclical

Timing: Coincident indicator of the business cycle

Volatility: Moderate
 
Likely Impact on Financial Markets:

Interest Rates: Unexpectedly high quarterly GDP growth is perceived to be potentially inflationary if the economy is close to full capacity; this, in turn, causes bond prices to drop and yields and interest rates to rise. Also, higher than expected GDP growth, i..e. good news about the economy, is bad news for the bond market because a strong report causes concern that the Fed might raise the Fed Funds rate to avoid higher inflation. This is bearish for the fixed income market.

Stock Prices: Ambiguous. On one side higher than expected growth leads to higher profits and that's good for the stock market. On te other, it may increase expected inflation and lead to higher interest rates that are bad for the stock market.

Exchange Rates: Larger than expected GDP growth will tend to appreciate the exchange rate as it is expected to lead to higher interest rates.

Analysis of the indicator:
The five main components of the GDP are: (private) consumption, fixed investment, change in inventories, government purchases (i.e. government consumption), and net exports.

Traditionally, the U.S. economy's average growth rate has been between 2.5% and 3.0%. This is why many economists believe that this range represents the sustainable (or 'natural') long-run growth rate of potential output. Economic growth above this 'natural' growth rate cannot be sustained for too long: it can cause inflation and lead the Federal Reserve to increase the Fed Funds rate to tighten monetary policy in order to slow growth and prevent a pickup in inflation. However, GDP growth in the U.S. economy in 1996-1997 has been on average above 3% leading some to question the concept of a fixed 'natural' rate of growth. Trend increases in productivity growth or employment growth would lead to an increase in the sustainable rate of growth of GDP. See the pages on productivity controversies and NAIRU for more on this debate.  An economic downturn, or negative growth for two consecutive quarters, is defined as a recession. During a recession, the Fed will tend to lower interest rates to stimulate the economy and increase the growth rate.
 

WEB Links

A Graph of the latest GDP data from The Economic Statistics Briefing Room of the White House

A table with the most recent GDP data  from the BEA

The latest GDP report from BEA

You can chart GDP and other NIPA data from the NIPA VISUALIZATION PAGE

You can see GDP charts with the Economic Chart Dispenser

You can create customized GDP Charts with the Economic Chart Maker  Tip: type "GROSS DOMESTIC PRODUCT" in the Label section of the form and choose the transformation of the data you are interested in.

An analysis of the 1997-Q-3 GDP report from First Union

An Analysis of the 1997-Q3 GDP report from Morgan Stanley's Stephen Roach
 
An Analysis of the 1997-Q2 GDP report from Morgan Stanley's Stephen Roach
 

GDP Accounting: GDP = C + I + G + NX  (+ Residual)
 
Gross domestic product                                  =
 
Personal consumption expenditures (C)        +
 
  Durable goods.........................
  Nondurable goods......................
  Services..............................
 
Gross private domestic investment   (I)        +
 
  Fixed investment......................
    Nonresidential......................
      Structures........................
      Producers' durable equipment......
    Residential.........................
  Change in business inventories........

Government consumption expenditures and +
gross investment                              (G)                       
  Federal...............................
    National defense....................
    Nondefense..........................
  State and local.......................
 
Net exports of goods and services  (NX)        +
 
  Exports...............................
    Goods...............................
    Services............................
 
  Imports...............................
    Goods...............................
    Services............................
 
Residual
 
A chart of the GDP growth from the Mortgage Mart: