David Waring

In yesterday’s lesson we started a new series on market movements caused by economic releases with a look at the headline Gross Domestic Product number. In today’s lesson we are going to dig further into the GDP figure with a look at the components which make up the number and why these are important to traders.

In addition to looking at the growth or lack thereof in the overall GDP number, traders will also look at the growth or lack there of in the different components that make up the number. As GDP represents the value of everything in an Economy you can imagine the amount of data that goes into compiling the number, much of which is published for market participants to view. By looking at the different pieces which make up GDP we can get a good picture of what is happening not only with the overall economy but with all the different components of the economy which are reported on to come up with the final number. .

Now we could spend many lessons going over all the data that is in this report. The goal here however is to build a framework for understanding the major components so we as traders can understand what is going on when the market reacts to certain pieces of the report and will recognize when to dig deeper for more information on what is happening in a certain sector. The broad categories that it is important to have an understanding of are:

1. Personal Consumption Expenditures – as over 65% of the US economy is made up of this category, what the individual consumer is doing ie the growth or lack thereof in their consumption, as well as on what goods and services they are spending their money on is heavily focused on.

2. Private Investment - This includes purchases of things such as computers, equipment and inventories (known as fixed assets) by businesses, purchases of homes by individuals, and of businesses investing in inventories of goods to sell. These are all obviously important things, as how much businesses are investing is a good indication of how they feel about future growth prospects, and how much growth the housing market is experiencing is also an important component of the economy.

3. Government Spending – this includes pretty much everything the government spends money on besides social programs.

4. Exports – Imports – an important number which shows how wide the gap is between how much the country exports and how much it imports.

What the GDP number is going to give you a feel for is how much each of the above grew for the quarter and what their overall contribution to the economy was. The above numbers will then be broken down into more detailed numbers which go into compiling the final number for the above 4 categories.

As I discussed at the beginning of the lesson you can dig much much deeper into these numbers to get a feel for what is happening all over the economy. Now that you understand these broad categories however you should be better equipped to quickly gain an understanding of why the market is focusing on a particular piece of data which was released in the report.

You will also find after following these numbers that the market will turn its focus to different parts of the report depending on what is happening with the economy. To help better understand this I will be posting a discussion starter on what happens after the next few GDP numbers are released on this lesson on InformedTrades.com. If you are watching this video on Youtube I have included a link to the lesson in the description section of this page so I encourage everyone to check back after the next GDP release so we can start a discussion on what the release means to the market. If you would like a reminder when I post the discussion starter you can goto the thread and click on “article tools” once logged into the forum and subscribe to the thread. After doing this you will receive an email when that discussion is started.

That’s our lesson for today. In tomorrow’s lesson we will look at several more economic numbers that lead the GDP number and help market participants predict how much growth the economy is experiencing before GDP is released so we hope to see you in that lesson.

As always if you have any questions or comments please post them in the comments section below, and good luck with your trading!

David Waring

The preliminary GDP number was released today so as promised here is a quick note to hopefully get a discussion going on GDP.

Here is a good article from the Wall Street Journal covering the release:

Free Preview - WSJ.com

The WSJ requires a subscription but you can get a free two week trial if you do not have one and in my opinion its a site that is well worth the price of signing up.

As you will see if you read through the article the GDP number came out at .6% annual growth rate. So there are two things that jump out at me right away from that number. Number 1 is that the number came in off estimates as economists were expecting the number to come in at .8% . Number two as you can see in the article is that this was down from 4.9% in the previous quarter which shows just how much the economy has slowed.

Another point that catches my eye is that consumer spending and the residential fixed investment which is housing was revised downard two important things to note because, as I mention in my lesson, of the important role that the consumer plays in the economy and all the attention that is on the housing market right now.

The fact that the Preliminary number came out weaker than expected combined with the fact that, jobless claims, which were also reported this morning were larger than expected were two major contributers to the fact that the market was down at least in the morning trade up to the point of this post.

There are lots of other things in the above articles so I encourage people to discuss further below.

Best Regards,
Dave

Airelon

Heyya Dave,

I am RIGHT with you on what jumped out at me from those numbers. Last month I thought: Wow. Slowdown in GDP - but the market is just concerned about the Interest rate cut, and hanging their every $ on the size of the rate cut. And now this month? Another slowdown, and below estimates.

Like I said in that one video? GDP is what's real to my mind. What is truly important. It includes where the money is going from Joe public that doesn't give a whipstich about the markets. Which to my mind - is the most important aspect about the GDP.

And after watching todays testimony on Bloomberg? I mean - is it just me, or are members of Congress starting to finally hammer Berneke on the key issues that many of us have been complaining about since August? He was getting NAILED there for about 10 minutes there. His only defense was: "Yeah, but the data lags behind the actual". I firmly believe that this is where the Fed needs to concentrate more on what speculators are doing in the Futures markets. That's discounted wayyyy too much. Futures speculators have been talking about the issues that are finally being raised by members of congress, 6 months ago.

David Waring

Hey Airlone,

Yeh although I feel like he kind of got left holding the bag I am with you on Bernanke. I think the issue here is that you got your academic/academic personality type Fed chairmen and then you have your academic/trader type personality Fed chairmen. When things are rocky like right now what is needed is the academic/trader type personality that can keep things simple and not cloud things with too much data.

Enjoyed your video today. Keep um coming.

Best Regards,
Dave

nuhonguoc

Yesterday i checked forexfactory for news and nothing important news about CAD/JPY,it's about 8:00 8:30AM on forexfactory,but CAD/JPY move strongly,i don't understand?