Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. Why Investors Care
| Released on 7/31/08 For Q2 Advance 2008 | |||||||||||||||||||||||||
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Highlights
The first estimate for second quarter GDP showed that the economy has dodged recession so far - although revisions show we came very close. Measured GDP inflation slowed sharply due to technical quirks in the overall price index. Second quarter real GDP posted a 1.9 percent annualized gain, following a revised 0.9 percent rise the prior quarter. The markets had expected a 2.4 percent boost for the second quarter. The higher second quarter growth was driven by exports, business spending on structures, and moderate consumer spending.
On the inflation front, the GDP price index rose an annualized 1.1 percent - down from the first quarter increase of 2.6 percent but the deceleration was a statistical quirk. The consensus had projected the second quarter increase to be 2.8 percent. The overall price index was moderated by the interaction of the import price index with other components. More realistically, the price index for domestic purchases accelerated sharply to an annualized 4.2 percent from 3.5 percent in the first quarter. Headline PCE inflation jumped to 4.2 percent from 3.6 percent while core PCE inflation eased to 2.1 percent from 2.3 percent in the first quarter.
Today's GDP release included annual revisions going back through 2005. The last three years of growth were revised down slightly. Using annual averages, real GDP growth for 2007 was revised down to 2.0 percent from 2.2 percent; 2006, to 2.8 percent from 2.9 percent; and 2005, to 2.9 percent from 3.1 percent. On a fourth quarter over fourth quarter basis, real GDP growth for 2007 was revised down to 2.3 percent from 2.5 percent; 2006, to 2.4 percent from 2.6 percent; and 2005, to 2.7 percent from 2.9 percent.
The annual revisions also gave us a contraction in the final quarter of last year - the fourth quarter slipped an annualized 0.2 percent, compared to the prior estimate of plus 0.6 percent. The economy came very close to recession over the last quarter of 2007 and first quarter of this year.
Despite the moderate improvement in GDP, markets might be somewhat timid today as quite a few of traders may be sitting on the sidelines, waiting on tomorrow's more current data in the employment report for July. The importance of more current data is seen in the fact that many economists have downgraded their forecasts for second half growth. Also, initial jobless claims jumped in this morning's release. Overall, the GDP and claims reports underwhelmed the markets - pointing to slippage in equities and a dip in bond yields.
GDP for the first quarter ended up at an annualized 1.0 percent, keeping the economy out of the official definition of recession. Despite continued turbulence in the financial sector, marginal easing in employment, higher gasoline prices, and continued weak housing, monthly data overall actually point to possible modest improvement in GDP for the second quarter. With income tax rebate checks, consumer spending on average was a positive and the low dollar has bolstered exports. The latest durables orders report also showed healthy shipments for nondefense capital goods. However, we are not likely to see good news on the inflation front. Higher energy prices will boost headline inflation substantially. The first quarter GDP price index came in at an annualized 2.7 percent.
Real GDP Consensus Forecast for advance Q2 08: +2.4 percent annual rate
Range: +1.4 to +3.0 percent annual rate
GDP price index Consensus Forecast for advance Q2 08: +2.8 percent annual rate
Range: +0.4 to +3.5 percent annual rate
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Real GDP growth is always quoted at a quarterly annual rate. It measures how much the economy has grown over a three-month period. Quarterly growth rates are often volatile; consequently, economists also like to look at the year-over-year growth in GDP. The yearly changes tend to be more stable. |
![[Chart]](chart_1.gif)
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It is common to compare quarterly changes at annual rates in the GDP price index. These can be volatile, just like the quarterly swings in real GDP growth; as a result, the trend in inflation is better determined by year- over- year changes. |
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