how to use gdp data
most nations release gdp data every month and quarter in the u s the bureau of economic analysis bea publishes an advance release of quarterly gdp four weeks after the quarter ends and a final release three months after the quarter ends the bea releases are exhaustive and contain a wealth of detail enabling economists and investors to obtain information and insights on various aspects of the economy 18gdp s market impact is generally limited since it is backward looking and a substantial amount of time has already elapsed between the quarter end and gdp data release however gdp data can have an impact on markets if the actual numbers differ considerably from expectations because gdp provides a direct indication of the health and growth of the economy businesses can use gdp as a guide to their business strategy government entities such as the fed in the u s use the growth rate and other gdp stats as part of their decision process in determining what type of monetary policies to implement if the growth rate is slowing they might implement an expansionary monetary policy to try to boost the economy if the growth rate is robust they might use monetary policy to slow things down to try to ward off inflation real gdp is the indicator that says the most about the health of the economy it is widely followed and discussed by economists analysts investors and policymakers the advance release of the latest data will almost always move markets although that impact can be limited as noted above gdp and investinginvestors watch gdp since it provides a framework for decision making the corporate profits and inventory data in the gdp report are a great resource for equity investors as both categories show total growth during the period corporate profits data also displays pre tax profits operating cash flows and breakdowns for all major sectors of the economy comparing the gdp growth rates of different countries can play a part in asset allocation aiding decisions about whether to invest in fast growing economies abroad and if so which ones one interesting metric that investors can use to get a sense of the valuation of an equity market is the ratio of total market capitalization to gdp expressed as a percentage the closest equivalent to this in terms of stock valuation is a company s market cap to total sales or revenues which in per share terms is the well known price to sales ratio just as stocks in different sectors trade at widely divergent price to sales ratios different nations trade at market cap to gdp ratios that are all over the map for example according to the world bank the u s had a market cap to gdp ratio of 197 4 for 2020 while china had a ratio of just over 83 6 and hong kong had a ratio of 1 777 2 19however the utility of this ratio lies in comparing it to historical norms for a particular nation as an example the u s had a market cap to gdp ratio of 141 6 at the end of 2006 which dropped to 78 5 by the end of 2008 19 in retrospect these represented zones of substantial overvaluation and undervaluation respectively for u s equities the biggest downside of this data is its lack of timeliness investors only get one update per quarter and revisions can be large enough to significantly alter the percentage change in gdp history of gdpthe concept of gdp was first proposed in 1937 in a report to the u s congress in response to the great depression conceived of and presented by an economist at the national bureau of economic research nber simon kuznets 20at the time the preeminent system of measurement was gnp after the bretton woods conference in 1944 gdp was widely adopted as the standard means for measuring national economies however the u s continued to use gnp as its official measure of economic welfare until 1991 after which it switched to gdp 2122beginning in the 1950s however some economists and policymakers began to question gdp some observed for example a tendency to accept gdp as an absolute indicator of a nation s failure or success despite its failure to account for health happiness in equality and other constituent factors of public welfare in other words these critics drew attention to a distinction between economic progress and social progress most authorities like arthur okun an economist for president john f kennedy s council of economic advisers held firm to the belief that gdp is an absolute indicator of economic success claiming that for every increase in gdp there would be a corresponding drop in unemployment 23criticisms of gdpthere are of course drawbacks to using gdp as an indicator in addition to the lack of timeliness some criticisms of gdp as a measure are global sources for country gdp datathe world bank hosts one of the most reliable web based databases it has one of the best and most comprehensive lists of countries for which it tracks gdp data the international money fund imf also provides gdp data through its multiple databases such as world economic outlook and international financial statistics 2627another highly reliable source of gdp data is the organization for economic cooperation and development oecd the oecd not only provides historical data but also forecasts gdp growth the disadvantage of using the oecd database is that it tracks only oecd member countries and a few nonmember countries 28in the u s the fed collects data from multiple sources including a country s statistical agencies and the world bank the only drawback to using a fed database is a lack of updating in gdp data and an absence of data for certain countries 29the bea is a division of the u s department of commerce it issues its own analysis document with each gdp release which is a great investor tool for analyzing figures and trends and reading highlights of the very lengthy full release 18