Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. Why Investors Care
| Released on 4/27/07 For Q1 Advance 2007 | |||||||||||||||||||||||||
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Highlights
First quarter real GDP slowed to an annualized 1.3 percent from the 2.5 percent pace in the fourth quarter. The first quarter growth rate was below the market forecast for a 1.8 percent rise in GDP. On the inflation front, the GDP price index jumped to 4.0 percent, following a 1.7 percent increase in the fourth quarter. The latest price index figure was higher than the consensus projection for a 3.1 percent annualized increase. The core GDP price index accelerated to 3.0 percent from 2.3 percent in the fourth quarter. The core PCE deflator accelerated to 2.2 percent in the first quarter, after posting a 1.8 percent annualized pace in the fourth quarter. However, the faster pace reflected a change in quarterly averages - the more recent monthly pace is more moderate.
The deceleration in growth was due to a decline in exports, a rise in imports, slower government spending, and a marginal slowing in consumer spending. In the other direction, business fixed investment improved while residential and inventory investment were less negative than in the fourth quarter.
Separate from the impact of components on deceleration (the change in growth), overall strength remains in personal consumption, which posted a 3.8 percent annualized increase, following a 4.2 percent boost in the fourth quarter. Equipment investment and nonresidential structures rose 1.9 percent and 2.2 percent, respectively. The equipment component reflected a modest rebound from a decline the prior quarter.
Net exports widened to a $597.8 billion shortfall from a $582.6 billion gap in the fourth quarter. This reflected an annualized 1.2 percent drop in exports, following a 10.6 percent surge in the prior quarter. Imports rebounded 2.3 percent after a 2.6 percent drop in the previous quarter.
Year-on-year, real GDP fell to up 2.1 percent in the first quarter from 3.1 percent in the fourth quarter. Year-on-year, the GDP price index edged up to up 2.7 percent year from up 2.5 percent in the prior quarter. The core PCE deflator growth rate was unchanged at up 2.2 percent in the fourth quarter.
Today's report is favorable to bonds due to the slower growth while equities should not be happy about the sluggish growth. The relatively high quarterly change in core inflation does not reflect the more moderate monthly changes - especially taking into account the modest March gain in the CPI. Markets should discount much of the acceleration in the quarterly figure.
GDP for the fourth quarter came in at an annualized 2.5 percent and followed a 2.0 percent annualized increase in the third quarter. Markets are expecting a sluggish first quarter. Barring a figure that is not too far from the consensus, focus will be on the composition of GDP (final sales, inventories, investment, personal consumption among others) for hints at future growth. Also, markets will be focusing on the inflation numbers - especially the core PCE price index, the Fed's favorite inflation indicator. The fourth quarter GDP price index posted an annualized increase of 1.7 percent, the same as for the third quarter. The core PCE deflator came in at an annualized 1.9 percent in the fourth quarter.
Real GDP Consensus Forecast for advance Q1 07: +1.8 percent annual rate
Range: +1.4 to +2.7 percent annual rate
GDP price index Consensus Forecast for advance Q1 07: +3.1 percent annual rate
Range: +2.4 to +3.8 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. |
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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. |
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