Today I want to talk about what may be the most important three-letter acronym when it comes to the U.S. economic recovery: GDP, which stands for Gross Domestic Product.
GDP is the broadest measure of a nation’s economic activity—adding up the total value of all goods and services produced in the U.S. This influential status update on the U.S. economy takes into account net exports, government spending, consumption, investment and inventory. Of course, out of these, the most important component is consumption, which accounts for about two-thirds of GDP.
The latest report is the advance estimate for second-quarter GDP—because this is such an important report, the Commerce Department officially revises each quarter’s GDP estimates a total of four times: three during the quarter (advance, preliminary and final), as well as a final time once a year in July when the annual benchmark revisions are announced.
And what had the newswires buzzing this morning is that the U.S. economy grew at an annual rate of 1.7% in the second quarter. This outpaced economists’ estimates of 1% GDP growth. This time around, federal spending declined 1.5%, but that was a smaller drop than what we’ve seen in past quarters. U.S. trade also had a positive impact on growth: Exports rebounded 5.4%, a significant comeback from the previous quarter. Higher inventories, residential investment and personal consumption also made positive contributions to second-quarter GDP. At the same time, the Commerce Department revised its first-quarter estimate down to reflect just 1.1% GDP growth.
There’s no doubt that we would have liked to have seen faster growth—after all, it takes a 2% annual rate to make the unemployment rate decline. But the silver lining to this is that the Fed will need to keep its money pump on for the foreseeable future. There is mounting evidence that the Fed’s earlier projections for the economic recovery were far too rosey, so it will likely err on the side of caution in terms of monetary policy. And this has huge implications for investors. If you remember back to last month’s GDP report, Wall Street celebrated when first-quarter GDP fell far short of economists’ expectations. And now that the first-quarter estimate has been revised down even lower, we won’t likely see the end of the Fed stimulus anytime soon