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 first-quarter GDP—which measures the U.S. economy’s progress from January through March 2014. 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 just 0.1% in the first quarter, down from 2.6% growth in the fourth quarter. Economists were looking for a 1.0% annual rate, so the result was pretty grim. Even so, Wall Street took the news in stride, with the benchmark indices finishing up 0.2% to 0.3% for the day.
That’s because we all keenly remember how the unusually cold winter put a damper on everything from retail spending to homebuilding activity to even hiring, in certain industries. But the biggest drags on growth in the first quarter was the widening trade gap and dwindling business inventories. This silver lining to this cloud is that both of these components will likely reverse course and gain in the second quarter.
The positives from this report were stronger-than-expected consumer activity, particularly in utility services spending and health care spending. Federal government spending also ticked up. So it appears that the U.S. economy is still recovering in fits and starts and that further Fed action is probably necessarily to keep up the momentum. This is a plus for investors as the Fed’s continued bond buying provides a major incentive for money to flow into the stock market. So it’s understandable why Wall Street barely batted an eyelash at the lackluster Q1 report.