<%@ Language=VBScript %> Econoday Report: Gross Domestic Product  31, 2007
Gross Domestic Product
Definition
Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy.  Why Investors Care

Released on 1/31/07 For Q4 Advance 2006
Real GDP - Q/Q change - SAAR
 Actual 3.5%  
 Consensus 3.1%  
 Consensus Range 2.8%  to  3.6%  
 Previous 2.0 %  
   
GDP price index - Q/Q change - SAAR
  Actual 1.5%  
 Consensus 1.5%  
 Consensus Range 0.5%  to  2.0%  
 Previous 1.9 %  

Highlights
Fourth quarter real GDP jumped to an annualized 3.5 percent from the 2.0 percent pace in the third quarter. The fourth quarter growth rate was above the consensus forecast for a 3.1 percent boost in GDP. The acceleration in growth was primarily due to acceleration in growth in nondurables personal consumption, government purchases, and in exports as well as a drop in imports. Partly offsetting these factors were a slowing in inventory growth and a small decline in business fixed investment.

Year-on-year, real GDP is up 3.4 percent in the fourth quarter, compared to 3.0 percent in the third quarter.

Overall strength for the quarter - separate from how each component contributed to the acceleration in the fourth quarter - was led by personal consumption and net exports. Overall PCEs advanced 4.4 percent, following a 2.8 percent rise in the third quarter. Strength was led by nondurable but durables also was very healthy. Net exports narrowed sharply in the fourth quarter to deficit of $581.4 billion from a shortfall of $628.8 billion in the third quarter. Real exports jumped a sharp 10.0 percent, following a 6.8 percent boost in the third quarter. Real imports actually fell an annualized 3.2 percent, following a 5.6 percent increase in the third quarter. Government spending was up 3.7 percent in the fourth quarter.

Weakness was led by an annualized 19.2 percent drop in residential investment - only slightly worse than the 18.7 percent drop the prior quarter. Business fixed investment dipped 0.4 percent in the fourth quarter, following a 10.0 percent surge in the third. The structures subcomponent actually posted a modest 2.8 percent increase while equipment & software declined an annualized 1.8 percent.

Final sales to domestic purchasers jumped to 2.4 percent from 2.0 in the third quarter. With this jump in demand, inventory investment slowed to a gain of $35.3 billion from 55.4 billion in the third quarter. The fourth quarter was good for bringing inventories back in line.

Turning to inflation, the overall GDP price index slowed to 1.5 percent annualized from 1.9 percent in the third quarter. The latest deceleration partly reflects lower oil prices. The consensus had expected the overall GDP deflator to post a 1.5 percent increase in the fourth quarter. The core deflator for PCEs - the preferred inflation measure of the Fed - nudged down to 2.1 percent from 2.2 percent annualized growth in the third quarter.

Year-on-year, the GDP price index fell to up 1.9 percent year from up 2.8 percent in the third quarter. On the same basis, the core PCE deflator growth rate eased to up 2.3 percent in the fourth quarter from up 2.4 percent in the third quarter.

Today's report shows a largely healthy economy. The consumer is back and the trade sector is robust. The composition of growth indicates that the economy is well positioned for further growth as inventories are back in line. Also, we can expect housing to be less of a drag in coming quarters. However, net exports may not help as much due to tighter monetary policy overseas. Speaking of which, the Fed must be happy with the price data but must be concerned with the strong growth. Today's report keeps the Fed on pause and should be a negative for bonds. The stock market should get a boost if today's good news is really seen as good news - but if interest rate concerns outweigh the growth news, then equities could dip. The bottom line is that Goldilocks is still around.

Market Consensus Before Announcement
Third quarter real GDP growth was revised down slightly to 2.0 percent annualized growth from the prior estimate of 2.2 percent. Wednesday we get our first look at fourth quarter GDP and the Fed will checking to see if the economy is running below the general estimate of 3 percent for long-term potential and to see if there is any improvement in the core PCE deflator. The consensus believes GDP will come in a little above trend with a 3.1 percent gain. The core deflator for PCEs rose 2.2 percent in the third quarter, following a 2.7 percent increase in the second quarter. The overall GDP price index rose only 1.9 percent in the third quarter due to some assistance from declining oil prices. The third quarter GDP price index had posted gains of 3.3 percent in each of the prior four quarters.

Real GDP Consensus Forecast for advance Q4 06: 3.1 percent annual rate
Range: 2.8 to 3.6 percent annual rate

GDP price index Consensus Forecast for advance Q4 06: 1.5 percent annual rate
Range: 0.5 to 2.0 percent annual rate
Trends
[Chart] 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] It is common to compare quarterly changes at annual rates in the GDP deflator. 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.
Data Source: Haver Analytics

2007 Release Schedule
Released On: 1/31 2/28 3/29 4/27 5/31 6/28 7/27 8/30 9/27 10/31 11/29 12/20
Released For: Q4a Q4p Q4f Q1a Q1p Q1f Q2a Q2p Q2f Q3a Q3p Q3f


 
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