Gross Domestic Product
Gross Domestic Product (GDP) is the total monetary value of all final goods and services produced within a country's borders during a specific time period, typically reported quarterly by the Bureau of Economic Analysis (BEA), and it is the broadest single measure of a nation's economic output.
GDP is computed using the expenditure approach: GDP = Private Consumption (C) + Gross Investment (I) + Government Spending (G) + Net Exports (X − M). In the United States, consumer spending (C) alone accounts for roughly 70% of GDP, which is why retail sales data, consumer confidence, and employment numbers are watched so intently by economists and investors. Business investment, residential construction, government expenditure, and trade balances make up the remainder.
The BEA releases three estimates of GDP for each quarter: the 'advance' estimate (roughly 30 days after quarter-end), the 'second' estimate (60 days), and the 'third' or 'final' estimate (90 days). Revisions between estimates can be substantial, sometimes changing the story of whether the economy grew or shrank. 'Real GDP' adjusts for inflation using the GDP deflator, while 'nominal GDP' does not. Analysts almost always focus on real GDP when discussing economic growth.
Two consecutive quarters of negative real GDP growth is the colloquial definition of a recession, though the official arbiter in the United States is the National Bureau of Economic Research (NBER), which uses a broader set of indicators. The COVID-19 recession was the sharpest in modern history: U.S. real GDP plunged at an annualized rate of 31.4% in the second quarter of 2020 — the steepest single-quarter contraction on record — before rebounding at a 33.4% annualized rate in the third quarter.
For equity investors, nominal GDP growth is closely linked to corporate revenue growth in aggregate. A robust GDP environment supports earnings growth, while a recessionary GDP environment pressures revenues and margins simultaneously. GDP data also influences Fed policy; the central bank monitors GDP alongside inflation and employment when calibrating interest rates, creating a feedback loop between economic output and financial conditions. GDP per capita (GDP divided by population) is the most common measure of living standards and economic development, and the U.S. consistently ranks among the highest in the world.