How Recent Economic Updates Impact US Department Stores (Part 1 of 10)
GDP is a key indicator
The growth rate in gross domestic product (or GDP) is a key indicator that reflects the rate at which the economy is growing. The US Bureau of Economic Analysis (or BEA) provides data on US real GDP, which measures the value of economic output, adjusted for price changes or inflation.
Fourth quarter GDP
On March 27, 2015, the BEA released its third and final estimate of real GDP for 4Q14. Real GDP growth rate was 2.2% for the fourth quarter of 2014, consistent with the 2.2% revision released in February 2015, but below analysts’ expectations of 2.4%.
Growth in the 4Q14 GDP was fueled by higher personal consumption expenditure, nonresidential and residential fixed investment, exports, and state and local government spending.
Comparison to the third quarter
In the third quarter of 2014, real GDP increased by an impressive 5.0%. The lower GDP growth rate in the fourth quarter was a result of higher imports, lower federal government spending, a deceleration in nonresidential fixed investment, and a bigger decline in private inventory investment.
Retailers to benefit from strong 2014 GDP Growth
For the full-year of 2014, real GDP increased 2.4% compared to 2.2% growth in 2013, which was the highest full-year growth post 2010. The retail sector, which includes consumer discretionary (XLY) (RXI) as well as consumer staples (XLP), tends to perform well in periods of economic expansion. The iShares Core S&P 500 ETF (IVV) invests 12.6% in the consumer discretionary sector and 9.6% in the consumer staples sector.
Consumers generally spend more on discretionary items in periods of economic expansion. The GDP growth may drive higher sales in department stores like Macy’s (M), JC Penney (JCP), Kohl’s (KSS), and Dillard’s (DDS). Department stores form 6.0% of the SPDR S&P Retail ETF (XRT). Part four of this series discusses consumer spending, which is the largest component of US GDP.
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