What GDP Doesn't Say
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (Fisher Investments) -- It's easy to find news and commentary bemoaning the U.S.'s lackluster rate of GDP growth -- particularly after last Friday's second-quarter 2011 growth revision to 1%. Many extrapolate from this that the U.S. economy is weak and isn't growing fast enough to add jobs. Further, many deduce the real GDP growth rate shows we're a hair's breadth from recession -- a view we don't share.
We aren't claiming we wouldn't be better off with faster GDP growth. We believe, though, that it is important to understand exactly what the GDP metric is and is not -- and appreciating where the metric may be flawed or misleading. Many focus on the headline growth rate -- but in our view, the real value of GDP reports lies in the bevy of underlying data supporting the headline growth rate.
>> Get your economic news on the go with TheStreet's iPad app.Consider the "net exports" component, a volatile series that often buoys or dampens headline GDP. In fact, one reason GDP was revised lower was downwardly revised exports and upwardly revised imports -- shaving nearly half a percent from headline growth. The government calculates net exports by subtracting imports from exports -- which means in the official calculation, imports detract from national economic health. But consider this hypothetical illustration: If trade rises and the Port of Long Beach sees a sharp rise in imports, the goods offloaded subtract from headline GDP. But more imports could mean more dock work -- possibly requiring more workers, generating more economic activity and likely signifying increased domestic demand for foreign goods. Those goods are transported, marketed and sold here in the U.S. -- or they're assembled and re-exported for sale abroad. Either way, that's good for American business, not bad. In our view, the totality of trade matters, not the subtraction of one component from the other Next, consider inventories. If they're down, that detracts from GDP in the headline rate calculation. But it could very well mean stores and warehouses have bare shelves -- possibly requiring restocking. Restocking those shelves requires orders and production -- a plus for the economy in future quarters. If you say, "Yes, but it detracted in Q2," then consider: If you're assessing economic drivers for stocks, what headline GDP did is backward-looking and thus is not predictive of future market movements -- future growth potential matters much more for stocks.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV