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 second estimate for second-quarter GDP—which measures the U.S. economy’s progress from April through June 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 4.2% in the second quarter, up from the 4% advance estimate and lightyears ahead of the 2.9% decline for the first quarter. Economists were looking for a 4.0% annual rate, so the result was also better than expected. Even so, this wasn’t enough to offset fears about the building tension in Ukraine, so the benchmark indices finished down 0.2% for the day.
The other reality is that global economic growth is slowing. In fact, Japan and Europe’s economies dramatically cooled off in the second quarter. Japan’s economic deceleration is mainly due to a sales tax increase, which caused domestic spending to contract. The woes in the EuroZone are a bit more serious, though, as the three biggest economies (Germany, France and Italy) are contracting or exhibiting virtually no growth. In addition, China’s economy also appears to be taking its foot off the gas.
As for the U.S., the growth indicates pent-up demand following the unseasonably cold winter. As such, the second quarter saw stronger consumer activity, higher private inventory investment and gains in both residential and nonresidential investment. Local government spending also ticked up. At the same time, rising importns and declining federal government spending weighed on second-quarter growth.
The bottom line is 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.