On January 27th, the Bureau of Economic Analysis will provide us with an estimate of the fourth quarter US Gross Domestic Product (GDP) of 2021. The projection average of WSJ economists is that the economy will grow 4.8% in the fourth quarter, and The Conference Board forecasts a 6% growth.
GDP is a primary metric used to analyse the health of a country’s economy. But why is this number important? Even without the GDP, you would know the US is facing many economic challenges: high inflation, supply chain shortages, energy shortages, and the Omicron variant. That is why the GDP is a lot more than just one number. It’s a report you don’t want to miss.
The mysterious number
The first thing to understand is how the GDP is calculated. Here is the formula:
Consumption + Government spending + Investment + Net Exports = GDP
This equation gathers together private consumer spending, the government budget, investments in the private sector and net exports to give us a snapshot of a country’s economy. But these numbers are based on an aggregate of statistics from many different areas, and here it starts to become interesting.
It’s more than GDP — it’s a guide for investors
The advanced GDP estimate and final GDP is one number. But the report itself is around 30 pages. It contains a plethora of valuable information about all sectors and various aspects of the US economy. For example, you can find statistics about the auto industry, food services, clothing industry, national defense, and a lot more.
Investors use the information in the report when considering where to invest their money. The report provides the last quarter’s information, but it also includes economic information from the last 2–4 years.
Investors can see which economic sectors are improving, and which are declining. They can see personal income statistics, corporate profits, price indexes and inflation’s influence on the economy. Businesses can gauge the health of their industry and those they may rely on for operations which will play into their decision-making for the upcoming year. And you may be thinking: I’m not reading the report, so why do I care?
The importance to the public
There are a number of people who are reading the report, and they will relay the important information to the public. For example, they will tell you that the economy is doing better than expected, which can cause stocks to rise in price. If the economy is worse than expected, stocks might fall.
There might be a report that the transportation industry is booming and, therefore, many will start investing in those types of stocks. Others might find an interesting trend in retail sales, which can alert investors to investment potential elsewhere.
Some may see the GDP and conclude: now is not the time to invest in US companies. Maybe there are better investments in Europe or Asia. It goes without saying that people in the field are comparing US GDP numbers to other countries’ numbers, which also can guide their investment decisions.
In short, it’s an event you should follow. And guess who is also following it?
GDP can affect policy
If we see positive GDP numbers, politicians can point to the information as proof that their policies are working — and possibly use it as political capital for future policies they seek to advance. Less favourable GDP numbers can be a warning sign that the government might need to change the direction of their policies.
Good or bad, governments can use this information to gauge where they need to focus resources in the future. This could mean spending more money on a certain sector that is weak or reinforcing a stronger sector, which, in turn, could affect your investments.
Here is the schedule
The Bureau of Economic Analysis releases three GDP estimates. The first is about a month after the quarter ends, set to be released on January 27th and is incomplete. The second estimate is released two months after the quarter ends, and later, the final GDP information is listed. For perspective, in the third quarter of 2021, the difference between the first and third estimates was an additional 0.3%.
There are challenges facing the US economy and the fourth quarter 2021 GDP will reflect that. For investors, it can be a great resource for future investment areas and opportunities.
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