Gross Domestic Product (GDP)

Source: Department of Commerce

Frequency: Quarterly, revised monthly

Availability: Three to four weeks following the reported quarter

Possible Impact on Interest Rates: Larger-than-expected quarterly increase or increasing trend is considered inflationary, causing bond prices to drop and yields and interest rates to rise.

Current Data Reported April 27, 2000: First quarter GDP was reported up 5.4%--strong, yet lower than the last three quarters. The gain was led by the largest increase in consumer spending in 17 years. Additionally, while the overall figure trended a bit lower, excluding a slowdown in inventory investment, the economy grew at the fastest pace in over 15 years. Of additional concern, inflation accelerated in the first three months of this year. The GDP's chain weight deflator jumped 2.7% in the first quarter. See "Overview" below for more information.

Overview: The gross domestic product (GDP) is the most important economic indicator published. Providing the broadest measure of economic activity, the GDP is considered the nation's report card.

The four major components of the GDP are: consumption, investment, government purchases, and net exports.

Consumption spending represents about 56% of the GDP and is divided into three categories: durable goods (items expected to last more than three years), nondurable goods (food and clothing), and services.

Investment spending accounts for about 14% of the GDP and covers three categories: nonresidential (spending on plants and equipment), residential (single-family and multi-family homes), and the change in business inventories.

Government spending represents about 17% of the GDP, covering spending on defense, roads, schools, etc.

Net exports account for the balance or about 13% of the GDP. Imports deduct from GDP and exports add to the figure. In recent years, the U. S. has consistently experienced net imports, with imports exceeding exports.

The economy's average sustainable growth rate has historically been between 2.5% and 3.0%. Rapid economic expansion, growth in excess of the average sustainable rate, is generally short-lived, as it can lead to inflation and, in turn, cause the Federal Reserve to tighten monetary policy in order to slow growth. An economic downturn, or negative growth, is known as a recession. During a recession, the Fed may lower interest rates to stimulate the economy and increase the growth rate.

The GDP for a given quarter is released in the first month following a quarter as the "advance estimate". The "preliminary estimate" is published in the second month, followed by the "revised" estimate in the third month.

The GDP report also includes inflation information: the implicit deflator, which measures price changes and changes in spending patterns, and the fixed-weight price deflator, which measures price changes for an established basket of over 5,000 goods and services.

Bad news is good news for the bond market. A weak GDP is received favorably by bond investors; a strong report causes concern the Fed might need to intervene and raise interest rates--a negative for the fixed income market.