Tag Archives: GDP

GDP: Final Estimate For First Quarter Is Much Worse Than Expected

GDP: Final Estimate For First Quarter Is Much Worse Than Expected

GDP Down

The Bureau of Economic Analysis (BEA) released its third and final estimate of U.S. GDP this morning and it was much worse than anticipated.

The BEA publishes three estimates for GDP, the first estimate is released about 30 days after the quarter ends. The next two follow about 30 and 60 days later. Hence, the third and final estimate was released this morning which revised GDP down to a negative 2.9% in the first quarter of 2014.

Related: What is GDP and Why is it Important?

The first estimate (April 30) indicated that the economy grew by a mere 0.1%. The second estimate (May 29) revised this to a negative 1.0%. Today, the estimate which will remain in the record book indicated that the economy contracted by nearly 3.0%. This sent stock futures lower on the news.

According to the report, the primary cause of the substantial negative revision was due to, “negative contributions from private inventory investment, exports, state and local government spending, nonresidential fixed investment, and residential fixed investment.”

As I mentioned in my most recent article, “Is There A Problem Brewing In The Stock Market?” stocks cannot continue to rise in the face of a weak economy. At some point, a slow economy will hurt corporate profits, which could be a catalyst for falling stock prices. Was the poor report due to the weather?

Of course, we’ll have to wait for the second quarter GDP estimate to know. However, if the second quarter is also negative (which is not expected), we’ll have a textbook recession, and stocks generally do not fare well leading up to and during the early stages of a recession. Stay tuned.

What is GDP and why is it so important?

What is GDP and why is it so important?

by Investopedia Staff

GDP Gross Domestic Product

Gross Domestic Product (GDP) is one the primary indicators used to gauge the health of a country’s economy. It represents the total dollar value of all goods and services produced over a specific time period – you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.

Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total.

The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.

European video on the basics of GDP explained:

As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy.

A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It’s not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.