Gross Domestic Product

The gross domestic product (GDP) provides the best 'report card' of economic activity for the nation.  It is considered the most important indicator published and measures the total production of goods and services in the US. 

The Bureau of Economic Analysis measures GDP based on total U.S. income and expenditures. The product side of the GDP is measured by adding all the labor, capital, and tax costs of producing the output while the consumption side gauges expenditures by households, businesses, government and net foreign purchases.

Since these input/output measures rarely balance,  a "GDP price deflator" converts output, measured at current prices, into constant-dollar GDP.  

This GDP is a good reflection of business cycle peaks and troughs. A GDP growth from 2.0% to 2.5% is considered optimal when the economy is at full employment.   Growth exceeding optimal levels leads to inflation causing the Federal Reserve to increase rates and slow economic growth while negative growth reveals an economy in recession causing the Fed to stimulate the economy by lowering rates. .

The four components of the GDP are:

Consumption spending (56% of the GDP) - includes durable goods (items expected to last more than three years), nondurables (food and clothing), and services.

Investment spending (14%) - includes nonresidential (plant and equipment), residential (single and multi-family housing), and changes in business inventories.

Government spending (17%) - defense, roads, schools, etc.

Net exports (13%) -  exports add to this figure while imports are deducted from GDP.  In the U.S., net imports have consistently exceeded exports.

Advantages

• Presents the most comprehensive picture of economic activity 
• Estimates output on both demand and supply sides
• Is an important measure of productivity growth when combined with employment data
• Significant increases  in inventories imply that supply has exceeded demand which negatively impacts future growth

Disadvantages

• GDP data is only released quarterly and may not be as reliable as other monthly indicators of economic activity
• Some biases exist in the measurement of prices which can cause an underestimation of real output productivity and growth
• Regional data is not available

Reliability 

• A weak GDP is viewed favorably by bond investors while a strong GDP raises concerns the Fed could raise interest rates. The GDP is viewed as a good forecasting measure of economic activity. 

 Link To Government Data!