Module 10 · Lesson 8 of 12 · Fundamentals and macro · About 5 minutes
GDP, PMI and Retail Sales: Measuring Economic Growth
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Before you read: The Jobs Report: Payrolls, Unemployment and Wages
What you will learn
- What gross domestic product measures and how US GDP estimates are released and revised.
- How a purchasing managers’ index works and why 50 is the dividing line.
- What retail sales and other monthly reports add.
What is GDP?
How do you add up everything an economy produces?
Gross domestic product is the market value of the final goods and services produced in an economy over a period. One common way to break it down is by spending:
GDP = consumption + investment + government spending + (exports − imports).
In the United States, consumer spending is the largest part. US GDP is published by the Bureau of Economic Analysis (BEA) every quarter. Real GDP removes the effect of price changes, so it measures volume rather than value.
How is US GDP reported?
Why might a growth figure change months after it is first published?
The BEA publishes an advance estimate about a month after each quarter ends, followed by second and third estimates in the next two months as more data arrives, plus annual updates. Growth is quoted as a seasonally adjusted annualized rate: a quarter in which real GDP rose about 0.5% is reported as about 2% annualized. Many other countries quote quarter-over-quarter growth without annualizing, so the same economy can look very different in two headlines. Two consecutive quarters of falling real GDP are often described as a recession, but in the United States recessions are dated by a committee of the National Bureau of Economic Research, using a wider range of data.
What is a PMI?
Can a survey of managers give an early read on the economy?
A purchasing managers’ index is a monthly survey asking purchasing managers whether measures such as new orders, output, employment, supplier delivery times and inventories are higher, the same or lower than the month before (for delivery times, slower or faster). The answers are combined into an index:
- Above 50 means more respondents reported improvement than deterioration.
- Below 50 means the reverse.
- 50 means no change on balance.
A PMI mainly measures how widespread a change is. A reading of 52 says that, on balance, more firms reported an increase than a decrease. ISM notes that the distance from 50 indicates the extent of expansion or decline, but a PMI is not a growth rate: 52 does not mean output grew 2%. In the United States, the Institute for Supply Management publishes widely followed manufacturing and services surveys, and S&P Global publishes PMIs for many countries. PMIs come out early, often at or soon after the start of the month they follow, which is why markets watch them.
What does retail sales show?
How much did consumers spend last month?
The US Census Bureau publishes advance monthly retail sales about two weeks after the month ends, usually at 8:30 a.m. Eastern Time. It measures sales at retailers and food service businesses in dollars, not adjusted for inflation, so higher prices alone can raise it. Readers often look at a “control group,” a market convention rather than a Census Bureau category, that usually excludes autos, gasoline, building materials and food services. It gets attention because the BEA uses retail sales data to estimate consumer spending on goods in GDP. Figures are revised the following months.
Growth data diagram
Illustrative diagram constructed for teaching. Not real market data.
The diagram shows a fictional timeline for one quarter: PMIs arrive first, monthly retail sales follow, and the advance, second and third GDP estimates come last. A gauge shows a PMI with 50 as the line between improvement and deterioration. It is constructed for teaching and is not real market data.
How do these reports fit together?
Which report is fastest, and which is most complete?
Early indicators like PMIs arrive quickly but measure breadth. Monthly data like retail sales and industrial production arrive a few weeks later. GDP is the most complete measure but arrives last and is revised. Markets often react most to the data that changes expectations the most, and the economic calendar shows when each is due.
What this does not tell you about growth data
- What any report will show or how markets will react.
- Exact release schedules, which each agency publishes.
- Whether the economy is in or heading for a recession.
- Nothing here suggests trading on any release.
Trademark note. S&P Global is a trademark of S&P Global Inc. or its affiliates. Used only for identification.
Method in Practice: a worked example for this topic, with John’s plan and three replays, is in Inflation Reports: CPI, PCE and PPI Explained.
Check yourself
- Name the four spending parts of GDP. Hint: households, businesses, government, trade.
- A PMI reads 48. What does that say on balance? Hint: compare with 50.
- Why can retail sales rise even if people buy fewer goods? Hint: it is measured in dollars.
Reflect on your own process
- When you record a growth figure, do your notes say whether it is annualized, real or nominal, and which estimate vintage it is?
- Which release calendar does your process use to check data dates, and how often do you confirm it?
- How would you check a headline's PMI or GDP claim against the publisher's own release and definitions?