GDP
Published by: Bureau of Economic Analysis
Frequency: Quarterly
Period Covered: prior quarter
Volatility: Moderate
Market significance: very high
Web site: www.doc.gov
How do markets react?
GDP ↑ > Stock market ↑
GDP ↑ > Bond market ↓
GDP ↑ > Dollar appreciates
Some details:
- best measure of economic activity
- 3 estimates every quarter:
a) Advance report: first month of the
quarter. It is based on consumption
information and some information on the
other components of GDP.
b) Preliminary report: second month of the
quarter, includes almost all information.
c) Revised (or final) report: third month of the
quarter, includes all information.
- The GDP report contains two estimates of real
GDP
1. Built from the final demand categories:
C+I+G+NX
2. Built from the income side:
Personal income and corporate profit
by construction 1 = 2
- The GDP report contains information about inflation:
1. Implicit deflator: measures a combination of price
changes and changes in the composition of GDP.
Not a pure measure of inflation.
2. Fixed-weight deflator: provides a measure of price
changes for a given basket of goods and services. It
is a pure measure of inflation.
3. Chain weighted price deflator: the index allows
the quantity of purchase-weights to vary over time.
Hence, real output is based on contemporaneous
spending patterns.
- Note that it is possible to use information on monthly
indicators to forecast GDP
EX. Personal consumption expenditures:
-Durable goods
-Non-durable goods
- Services
- Keys to interpreting the GDP report:
a) Pay close attention to inventory changes, the
behavior of inventories has significant implications
for future growth.
b) Focus upon the GDP chain-weighted price index
as the most comprehensive measure of prices in the
economy. It is a more comprehensive price indicator
than the CPI or the PPI.
c) Look at the pace of exports and imports. It has
implications for the exchange rate market.
d) Keep in mind that, traditionally, revisions to the
GDP figures have a significant impact on financial
markets.
Statistical Analysis
Variables:
GDP: Real GDP measured in billions of chained 2000 dollars. Source:
Bureau of Economic Analysis.
Stock market measure: Dow Jones Average.
Source: www.djindexes.com
FED announcement dates: binary variable, assumes the value of 1 in
any period when the FED made a policy announcement and 0
otherwise. Source: Federal Reserve
Period of Analysis: 1990:I-2003:IV
Graphic relationship between GDP and the Stock
Market
Levels
8.4
8.0
9.3
7.6
9.2
7.2
9.1
6.8
9.0
6.4
8.9
8.8
1990
1992
1994
1996
LOG(DJ)
1998
2000
LOG(GDP)
2002
Annual Growth Rates
.4
.2
.06
.0
.04
-.2
.02
-.4
.00
-.02
1990
1992
1994
1996
@PCHY(DJ)
1998
2000
2002
@PCHY(GDP)
Descriptive Statistics
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
LOG(DJ)
7.547097
7.623849
8.106940
6.782985
0.425978
-0.221121
1.505406
LOG(GDP)
9.053289
9.048208
9.268619
8.859477
0.132335
0.000139
1.557901
Jarque-Bera
Probability
5.668577
0.058760
4.852514
0.088367
Sum
Sum Sq. Dev.
422.6375
9.980149
506.9842
0.963188
Observations
Correlation
56
.94
56
Regression Analysis (Long Run)
Dependent Variable: LOG(DJ)
Method: Least Squares
Date: 04/10/04 Time: 20:15
Sample: 1990:1 2003:4
Included observations: 56
Variable
C
LOG(GDP)
FED
Coefficient
-19.72734
3.012655
-0.077969
R-squared
0.875937
Adjusted R-squared 0.873640
S.E. of regression 0.151423
Sum squared resid 1.238166
Log likelihood
27.26762
Durbin-Watson stat 0.257150
Std. Error
1.396976
0.154290
0.049149
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)
t-Statistic
-14.12146
19.52596
-1.586392
Prob.
0.0000
0.0000
0.1186
7.547097
0.425978
-0.90241
-0.83008
381.2633
0.000000
Regression Analysis (short run)
Dependent Variable: DLOG(DJ)
Method: Least Squares
Date: 04/18/04 Time: 20:00
Sample(adjusted): 1990:2 2003:4
Included observations: 55 after adjusting endpoints
Variable
C
DLOG(GDP)
FED
Coefficient
0.014347
2.127120
-0.019682
R-squared
0.043835
Adjusted R-squared 0.007059
S.E. of regression 0.077452
Sum squared resid 0.311934
Log likelihood
64.19652
Durbin-Watson stat 2.265988
Std. Error
0.020774
1.866384
0.020970
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)
t-Statistic
0.690620
1.139701
-0.938601
0.019761
0.077726
-2.225328
-2.115837
1.191955
0.311785
Prob.
0.4929
0.2596
0.3523
Short-run response of DJ to GDP
Response to Cholesky One S.D. Innovations ± 2 S.E.
Response of DLOG(DJ) to DLOG(DJ)
Response of DLOG(DJ) to DLOG(GDP)
.10
.10
.08
.08
.06
.06
.04
.04
.02
.02
.00
.00
-.02
-.02
-.04
-.04
1
2
3
4
5
6
7
8
9
10
1
Response of DLOG(GDP) to DLOG(DJ)
.007
.006
.006
.005
.005
.004
.004
.003
.003
.002
.002
.001
.001
.000
.000
-.001
-.001
2
3
4
5
6
7
8
9
3
4
5
6
7
8
9
10
Response of DLOG(GDP) to DLOG(GDP)
.007
1
2
10
1
2
3
4
5
6
7
8
9
10
Discussion of the Results
The graphic analysis suggests that there exists a
positive relationship between GDP and the performance
of the stock market.
This relationship is confirmed by the correlation
coefficient.
The results of the long-run regression analysis indicate
that the response of the stock market to changes in GDP
is positive and significant. In addition, announcements by
the FED show a negative relationship with stock market
performance. However, these results are not sustained
in the short run.