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WEEKLY ECONOMIC COMMENTARY
The ABCs of GDP
GDP is reported by the BEA in severaldierent ways, but the most commonly cited way is on a real(infation-adjusted) seasonally adjusted annualized basis. GDP isseasonally adjusted to smooth out the fuctuation in the economy relatedto weather patterns, shopping patterns, holidays, school vacations, etc., toallow apples-to-apples comparisons between quarters. For example, vehicleassembly plants typically shut down in July, which would depress GDP inthe third quarter (July, August, and September) relative to the second quarter(April, May, and June). Similarly, sales o jewelry spikes around Christmasand again at Valentine’s Day. Seasonally adjusting the data helps marketparticipants to see through the swings in the seasonal data and helps to revealthe true underlying health o the economy at any time o the year.
Business capital spending.
Part o “I,” business capitalspending (capex), is what businesses spend on machinery,sotware, urniture, vehicles, computers, iPads, etc.Businesses spent an annualized $1.2 trillion on equipment andsotware in the rst quarter o 2013, accounting or 8% o GDP.Business capital spending is very sensitive to economic conditions.Business capital spending did not surpass its pre-Great Recessionpeak o $1.1 trillion until mid-2012. Market participants digest plentyo “input” data on business capital spending — Institute or SupplyManagement (ISM), durable goods orders and shipments, theregional Federal Reserve Bank manuacturing indices, reports romcompanies, truck sales, steel production, and rail car loadings — wellahead o the GDP report, but there is more inormation available togauge consumer spending than there is to gauge business spending.
Consumption or consumer spending,
ondurable goods, non-durable goods, and services.Consumption accounts or two-thirds o GDP. Inthe rst quarter o 2013, consumers spent an annualized$9.7 trillion, adjusted or infation. Consumption surpassedits pre-Great Recession peak o $9.3 trillion in early2011. O all the categories o GDP, consumption is themost visible to most consumers. We all spend moneyon various items every day. The data sets that provideinput to the consumption portion o GDP — weekly retailsales, chain store sales, vehicle sales, etc. — is bothrobust and abundant. By the time GDP is released, mostmarket participants have a pretty good sense o what thiscomponent o GDP is doing.
Source: Bureau o Economic Analysis, Haver Analytics 04/29/13Shaded areas indicate recession.
8%4%0%-4%-8%-12%Real Gross Domestic Product: Quantity Index
Seasonally Adjusted Annual Rate, % Change
GDP Growth Has Averaged 2.0% Over the PastThree Quarters
GDP is seasonally adjusted to smoothout the fuctuation in the economyrelated to weather patterns, shoppingpatterns, holidays, school vacations, etc.