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.

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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.

Last, GDP, like all economic data, fluctuates often. It's not unusual to see the headline growth rate decelerate mid-recovery only to reaccelerate later. Since 1947, quarterly GDP has decelerated in periods of economic growth roughly 90 times. Approximately 90% of the time, it later reaccelerated. Sure, sometimes this preceded recession -- but far more often it didn't.

Since headline GDP has problems in truly capturing economic health, it's difficult to conclude a certain level generates jobs, while a weaker level doesn't -- or that a particular level will or won't ward off recession ahead.

All in all, the headline GDP growth rate is a useful metric, as it allows analysts a baseline for apples-to-apples economic growth comparisons globally. But it has some construction oddities requiring deeper digging to truly assess the economy. The simple fact is, no one piece of data is an instant, one-stop shop for determining how growth is or isn't progressing. The economy is far too complex and diverse to lend itself to easy distillation into one number.

(This article constitutes the views, opinions, analyses and commentary of Fisher Investments as of August 2011 and should not be regarded as personal investment advice. No assurances are made Fisher Investments will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.)

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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