GDP: Lagging indicator of itself

July 22, 2011

Excluding the monthly employment report, gross domestic product is the Big Kahuna of economic indicators. For better or worse — and to the chagrin of its creator Simon Kuznets — GDP has become  the scorecard of a country’s economic performance.

Yet for financial markets seeking to anticipate the future, GDP always comes a little too late. Case in point: we only get the first estimate of second quarter GDP next week, almost a full month into the third quarter.

The number still has a big psychological impact. It sets the tone for forecast revisions, and the report’s composition, particularly the mix of consumer spending and business investment, offers clues about upcoming trends. GDP is projected to have risen just 1.8 percent in the second quarter, even more paltry than the first quarter’s 1.9 percent clip. The range of forecasts is pretty wide: from 0.9 percent at the low end all the way to 2.9 percent at the top.

But as the week draws to a close, the Q2 GDP reading will likely be eclipsed by more forward looking indicators that offer hints of whether the third quarter will bring a much hoped-for rebound.

A purchasing managers’ survey of Midwest manufacturing, for instance, will give clues into the strength of the factory sector, which has petered out in recent months. The index is expected to decline slightly to a still-robust 60.0.

A separate report on consumer sentiment from Thomson Reuters/University of Michigan is seen holding steady at historically low levels. Analysts at Goldman Sachs suspect confidence may have been dented by Washington’s acrimonious battle over the debt ceiling and the threat of default.

 

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