GDP: what the number says and what it does not

Gross domestic product is the total value of final goods and services produced in a country over a period. It is aggregated to the limit, which is exactly why people draw conclusions from it that are not there.

What is in it

The scale of the economy and the trajectory of that scale. GDP growth means more was produced than in the comparable period.

The qualifier "real" matters: nominal GDP also grows with inflation. The real figure is stripped of price changes and therefore comparable across periods.

What is not in it

Distribution. An economy can grow while the median income stands still.

Composition. Growth from commodity extraction and growth from manufacturing look identical in the number and mean different things.

Durability. A recovery after a collapse and growth from a new base are different phenomena with the same figure.

The link to the equity market

Weaker than it seems. The market prices the future profits of specific listed companies, while GDP measures the past output of the whole economy, unlisted parts included. Years of confident economic growth alongside a falling market are entirely normal.

The link to individual sectors' profits is stronger: demand for steel, transport and retail really does follow economic activity.

Leading indicators

Investors watch not so much GDP as the indicators published earlier: business activity indices, freight turnover, electricity consumption. GDP arrives quarters late and therefore contains almost no news by the time it appears.

On reading macro data together, see The macro calendar: what is published and what of it matters. On inflation, Inflation: how it is measured and why it differs from yours.