The Week Ahead – GDP

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

Last week was Thanksgiving, and while it is always good to remember that there is a lot for which to be grateful, it is especially so when sentiment turns from optimism to pessimism. While there has been some nascent sogginess in economic data, overall economic fundamentals remain strong.

This week we get the first revision of third quarter (Q3) Gross Domestic Product (GDP), which measures the total value of goods and services the U.S. economy produces. While Q3 GDP was announced last month, coming in at a very strong 3.5% annualized growth rate, this statistic goes through a series of revisions as the data continue to flow in with increasing precision. The Bureau of Economic Analysis (BEA) releases multiple estimates of each quarter’s GDP, one each month beginning the month after quarter end. The BEA also issues annual revisions each July and benchmark revisions every few years. Those revisions are often substantial. Since 1975 the first revision averages half a percent, while the second revision tends to be much smaller at a quarter of a percentage point. Most astounding is how much the official GDP statistic changes from the third estimate to its historical measure as refined by multiple revisions: nearly 1.5 percentage points.

The modern concept of GDP was first developed during the Great Depression for a congressional report in 1934. Congress needed a way of showing that the economy was growing - some metric to show progress. Interestingly, the economist who developed the GDP metric warned against its use as a measure of welfare. Producing more goods and services doesn’t always mean that society is better off. For example, GDP goes up after natural disasters such as hurricane Florence due the amount of goods and services necessary to rebuild. However, society is certainly no better off after such a tragedy.

In 1944, GDP became the main tool for measuring a country's economy. The value added by firms is relatively easy to calculate from their accounts, but the value added by the public sector, by financial industries, and by intangible asset (R&D, social networking, etc.) creation is more complex. Intangible activities are difficult to quantify, and are increasingly important in advanced economies.

Like an unwelcome house guest, market volatility is likely here to stay through the holidays. But, it’s important to recognize that the economy is growing nicely and the fundamentals are still positive:

• Best labor market since Woodstock (3.7% unemployment rate)
• Orderly credit markets
• Global GDP growth (3.7% estimate for 2018)
• Low inflation (2.0%)

…and that is something for which we should all be grateful.

Data deck for November 26-30: