GDP

1
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 ? gt Stock market ?
• GDP ? gt Bond market ?
• GDP ? gt Dollar appreciates

2

• 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.

3

• - The GDP report contains two estimates of real
• GDP
• 1. Built from the final demand categories
• CIGNX
• 2. Built from the income side
• Personal income and corporate profit
• by construction 1 2

4

• - 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.

5

• - 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.

6

• 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.

7
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 1990I-2003IV

8

• Graphic relationship between GDP and the Stock
  Market
• Levels

9

• Annual Growth Rates

10

• Descriptive Statistics
• LOG(DJ) LOG(GDP)
• Mean 7.547097 9.053289
• Median 7.623849 9.048208
• Maximum 8.106940 9.268619
• Minimum 6.782985 8.859477
• Std. Dev. 0.425978 0.132335
• Skewness -0.221121 0.000139
• Kurtosis 1.505406 1.557901
• Jarque-Bera 5.668577 4.852514
• Probability 0.058760 0.088367
• Sum 422.6375 506.9842
• Sum Sq. Dev. 9.980149 0.963188
• Observations 56 56
• Correlation .94

11

• Regression Analysis (Long Run)
• Dependent Variable LOG(DJ)
• Method Least Squares
• Date 04/10/04 Time 2015
• Sample 19901 20034
• Included observations 56
• Variable Coefficient Std. Error t-Statistic
  Prob.
• C -19.72734 1.396976 -14.12146 0.0000
• LOG(GDP) 3.012655 0.154290 19.52596
  0.0000
• FED -0.077969 0.049149 -1.586392 0.1186
• R-squared 0.875937 Mean dependent
  var 7.547097
• Adjusted R-squared 0.873640 S.D. dependent
  var 0.425978
• S.E. of regression 0.151423 Akaike info
  criterion -0.90241
• Sum squared resid 1.238166 Schwarz
  criterion -0.83008
• Log likelihood 27.26762 F-statistic 381.2633
  

12

• Regression Analysis (short run)
• Dependent Variable DLOG(DJ)
• Method Least Squares
• Date 04/18/04 Time 2000
• Sample(adjusted) 19902 20034
• Included observations 55 after adjusting
  endpoints
• Variable Coefficient Std. Error t-Statistic
  Prob.
• C 0.014347 0.020774 0.690620 0.4929
• DLOG(GDP) 2.127120 1.866384 1.139701
  0.2596
• FED -0.019682 0.020970 -0.938601 0.3523
• R-squared 0.043835 Mean dependent
  var 0.019761
• Adjusted R-squared 0.007059 S.D. dependent
  var 0.077726
• S.E. of regression 0.077452 Akaike info
  criterion -2.225328
• Sum squared resid 0.311934 Schwarz
  criterion -2.115837
• Log likelihood 64.19652 F-statistic 1.191955
  
• Durbin-Watson stat 2.265988
  Prob(F-statistic) 0.311785

13

• Short-run response of DJ to GDP

14

• 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.