Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. Why Investors Care
| Released on 3/29/07 For Q4 Final 2006 | |||||||||||||||||||||||||
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Highlights
For the final revisions until annual revisions this summer, fourth quarter real GDP was revised up to an annualized 2.5 percent from the prior estimate of 2.2 percent. The revision was above the market consensus projection of no net change from the 2.2 percent reported in February for the first revision. The fourth quarter pace followed a 2.0 percent annualized increase in the third quarter.
The modest upward revision in real GDP growth in the fourth quarter primarily reflected a dip in imports and somewhat stronger growth in PCEs, in exports, and in federal government spending. Partially offsetting were downturns in private inventory investment and in equipment and software and a slowing in nonresidential structures.
On the inflation front, the fourth quarter GDP price index was unrevised from the previous estimate of 1.7 percent. The consensus had projected no net revision from the February release estimate of 1.7 percent for the fourth quarter. The core PCE deflator also was unrevised from the previous estimate of 1.9 percent.
Year-on-year, real GDP is up 3.1 percent in the fourth quarter, compared to 3.0 percent in the third quarter. Year-on-year, the GDP price index declined to up 2.5 percent year from up 2.9 percent in the third quarter. The core PCE deflator growth rate decelerated to up 2.2 percent in the fourth quarter from up 2.4 percent in the third quarter.
Today's report shows somewhat better growth without worse inflation and should be favorable for equities. Combined with the 10,000 drop in initial jobless claims, the data should help to marginally sooth equity markets over concerns that economic growth is too weak.
Fourth quarter real GDP was revised down last month to an annualized 2.2 percent from the initial estimate of 3.5 percent. The 1.3 percentage point revision was an atypically large revision and was mainly due to downward revisions to inventory investment and business fixed investment. The markets are not expecting much change in the GDP figure for the second revision. The main point is that real growth is moderately below the 3 percent estimate for long-term potential growth - and the Fed wants the economy a little below potential to bring inflation down. As long as GDP is not revised much up or down, the markets likely will not care and will then focus on Friday's personal income report which has much more current data on the consumer sector and on inflation.
Real GDP Consensus Forecast for final Q4 06: +2.2 percent annual rate
Range: +2.0 to +2.3 percent annual rate
GDP price index Consensus Forecast for final Q4 06: +1.7 percent annual rate
Range: +1.6 to +1.8 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. |
![[Chart]](chart_1.gif)
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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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