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Must-know: The US economy grew 4.2% in the second quarter

Surbhi Jain

Why indicators in August show a strengthening US economy (Part 2 of 8)

(Continued from Part 1)

Why is the GDP statistic important?

Gross domestic product (or GDP) is an all-inclusive measure of economic activity. It includes all of the economic sectors. A country’s GDP measures the output of goods and services produced by labor and property located in the country. Real GDP—nominal GDP adjusted for inflation—compares two periods.

The real GDP is a comprehensive way to gauge the health and well-being of an economy. It indicates whether the economy’s total output of goods and services is growing or declining.

What does the current GDP reading say?

The Bureau of Economic Analysis (or BEA) at U.S. Department of Commerce released its second GDP estimate for the second quarter on August 28, 2014. The GDP is at a seasonally adjusted annual rate of 4.2%. The GDP is compared with the 2.1%—annualized—decrease in the GDP in the first quarter. The decrease in the first quarter was mainly due to adverse weather conditions. The comparison highlights the role of the weather conditions that dampened the first quarter GDP. It also shows the positive trend in economic recovery in the U.S. The second quarter estimate is promising.

The first estimate for the second quarter increase in real GDP stood at 4%. The final estimate will be released on September 26.

Market implications

GDP represents economic production and growth. It has a large impact on nearly everyone in the economy. For example, a healthy economy is characterized by increased employment opportunities and wages. Businesses demand labor to meet the needs of the growing economy. This drives equity indices like the SPDR S&P 500 ETF (SPY), the Vanguard Total Stock Market ETF (VTI), and the Dow Jones Industrial Average ETF (DIA). These exchange-traded funds (or ETFs) invest in blue-chip stocks like Johnson & Johnson (JNJ) and ExxonMobil (XOM).

A growing economy leads to higher consumption. This leads to growing sales and corporate profitability. We’ll discuss this in the next part of the series.

Continue to Part 3

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