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The Negative GDP Number Explained

Defense spending plays a major role in GDP


Video Transcript

I would say that there are a couple of things that we’re watching pretty close. Most of you probably saw the news that the GDP came out, and it was negative, so we have -0.1% growth on an annualized basis. I found that to be actually quite interesting because the thing you have to remember with GDP is that is actually comes out three times in a quarter.

The first report is actually the advanced report, and then you get the preliminary report, and then you get the final report. So, all throughout the year, pretty much every month, you get a GDP report because it’s revised, and then released, and then it’s revised twice more before it’s final.

So, in this case, it did come in at -0.1%, which is technically a recession but, in this case, it’s probably a lot more of just technicality rather than something very serious. I can show you what I mean.

To put some perspective on it, let’s go back in time and look at the last two times that the quarterly GDP went negative, which I show you on the chart in the video, in 2001 and in late 2008. At the time the GDP went negative in 2001 and 2008, there were a lot of other very serious problems. Now, that’s not to minimize the fact that we have a lot of problems right now, but we don’t have the kind of problems that we had back then … yet, anyway.

So, when we look at GDP, it’s probably an echo of two things. No. 1, defense spending in the third quarter, which is a component of GDP, was really high, so they pushed a lot of defense spending into the third quarter, so that’s one issue. If that spending isn’t happening in the fourth quarter because it happened in the third quarter, then you’re not going to get as much. It’s going to be missing.  So, it’s nothing to do with the economy, necessarily; it’s just when  the government spent its money.

The second thing is we had, of course, December that we had to deal with, with economic activity that is probably taking place in January right now that didn’t take place in December because we had the fiscal cliff anxiety and such. I’ll throw myself into the group of traders that were really stressed about that whole situation that continued to drag on and on and on much further than it should have. That will always drive down economic activity.

So, [the negative GDP] is probably a function of those two things put together.

Investor Place advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.

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