The gross domestic product report is the single most important reading on the state of the economy. It’s also one of the most overrated.
The headline numbers don’t tell you what you really need to know, especially if you’re an investor or trader. GDP readings are subject to big revisions — again and again and again. And, oh yes, GDP only tells you how the economy was doing months ago — not where it’s headed. When you think about it, that’s all that really matters.
Take Thursday’s latest GDP reading, the first revision to third-quarter growth. It turns out that, on the face of it, the economy grew at a much faster pace in July, August and September than originally thought. A month ago, the Commerce Department estimated that third-quarter GDP expanded a desultory 2%, or dangerously close to stall speed.
Cut to today, and that number was revised up to 2.7%. That’s still far too sluggish to make any kind of real dent in perniciously high unemployment, but, hey, it sure sounds a lot better than that first reading.
The market shrugged off the news because, well, it was so totally uninspiring, both for the reasons behind the revision and, of course, because we’ll get a third revision (measuring what happened last summer, mind you) in another month.
Which bring us to the internal components of GDP, which are more important to the Street than the headline number, anyway.
If you want to know why the huge jump in the third-quarter estimate was met with such a yawn (apart from missing expectations by a hair), it’s because the increase was driven by the stockpiling of inventories. Original estimates had inventories dropping by 0.12 percentage point, but in the latest reading, the Commerce Department said, nope, stockpile building actually added 0.77 percentage points to growth.
And since inventories rose last quarter, the thinking goes that businesses are tanked up for the future, meaning the summer stockpiling will actually be a drag on current-quarter growth.
More important, a whole bunch of critical components turned out to be much worse than first thought, like consumer spending (broadly 70% of all economic activity, which slowed to a level last seen in the second quarter of last year), business spending and wage gains. Oops.
So, if GDP is overrated, at least as it pertains to trading and investing, which reports are underrated, or at least should get more attention?
The monthly jobs reports — officially known as the Employment Situation Report — is the mother of all market-moving economic data points, but then that’s hardly a secret (and, like GDP, it’s also better at telling us where we’ve been than where we’re headed).
Since you’re probably already well aware of the splashes made by GDP and jobs numbers, we thought we’d point you to some less glamorous but arguably more important pieces of economic data for markets and market participants. Here are five of our favorites:
- Weekly Initial Jobless Claims. This high-frequency indicator gives a better idea of what’s happening in the labor market right now. The moving average also correlates very closely with the S&P 500. If you want to know where the market is headed, the weekly numbers give you a good bead.
- Retail Sales. With consumer spending accounting for more than two-thirds of all economic activity, retail sales are about half of that total. The data, delivered monthly, are more up-to-date than GDP readings, allowing for timely indications of changes in consumer spending patterns.
- Personal Income and Spending. Like retail sales, this one comes out monthly, and likewise gives insight into all-important consumer spending patterns. Income, savings and spending are the three basic variables driving everything from sales to imports to business investments to job growth.
- Durable Goods. Another monthly data point, new orders for durable goods, which include higher-priced, longer-lived things like cars, turbine engines and home appliances, give insight into future economic activity and, by extension, the direction of corporate sales and profits.
- ISM Purchasing Managers Index (PMI). Yes, manufacturing is a small part of the U.S. economy, but it’s also the canary in the coal mine because this is where recessions tend to begin and end. The Institute for Supply Management releases the PMI survey monthly. Readings below 50 indicate contraction, while anything above 50 means expansion.
Meantime, celebrate that revised GDP number, but don’t use it to make any big investment bets.