The GDP change game

The US third-quarter 2011 GDP growth rate comes out soon - the UK's soon after. My advice: everyone will anxiously await it, but pay no attention. It gets revised twice - maybe more. Even years later.

Even then it's not precise - true in the US, the UK and everywhere. If people get excited about GDP growth rate wiggles - for good or bad - bet against them. They're likely wrong.

GDP calculations are useful - to a degree. But they're government-compiled, hence wonky, based on inherently flawed assumptions and surveys. GDP growth rates are imperfect, backward-looking snapshots of the past. Example: the first US second-quarter 2011 GDP growth estimate (released in July) was 1.3%. It was revised down to 1.0% in August and markets fell. In September, it was revised up to 1.3%, beating expectations of 1.2%, and markets cheered that day. But why? We just ended up back where we started in the first place!

Plus, it could get re-stated - even years later. In July, along with second-quarter GDP, the US announced GDP revisions - some back to 2003. Eight years later, data was revised. Those were mostly small revisions, but the big revisions were in 2007-2010. Third-quarter 2007 US GDP growth was revised up 0.7% to 3.0% - which is nice, but who cares - it was four years ago.

Interestingly, then, folks were disappointed because the original estimate of 2.3% third-quarter growth was a deceleration from second quarter 2007's 3.2% (which was also revised up - to 3.6% - again, who cares). Silly to be so upset, then. Particularly since 2007 fourth-quarter growth of 2.9% was revised down 1.2% - from 2.9% to 1.7%.

First-quarter 2008's -0.7% growth was revised down 1.1% to -1.8%. Much worse than thought then. But the following quarter was revised up 0.7% to 1.3% - much better. If you thought fourth quarter 2008's -6.8% growth was bad, think again. It was much worse - revised down 2.1% to -8.9%. Yikes. But first quarter 2010 was revised up 2.1% - the same percentage swing, other direction - to 3.8%.

These are big moves, and just a few examples. Such big revisions are common - but they're in the past, and so, meaningless.

GDP isn't worthless, of course - it allows rough comparisons among nations. And, there is value in the transparency of the underlying data. But if GDP can move 1% or 2% four years later, you shouldn't fret little revisions now. And you shouldn't take GDP calculations as hard truth. All the joy or anxiety is silly - you can't be sure the data's even right.

For more of Ken's views on the turbulent nature of GDP, read:Don't be thrown off course by volatile GDP.

Third-quarter GDP globally will likely be better than most expect - but more importantly, likely better than the official data say. We just won't know it for a few years. Bet against the doomsayers. Plan your trades now. Buy stocks that should do well in an economy that's growing faster than most fathom.

Like these: Royal Caribbean Cruises, which is down 54% this year as investors expect that a global recession will kill cruise travel. This is the best time to buy a stock like this. Its 42 ships control a quarter of the world cruise market, and in my view it is the best managed of the bunch. As recession fears fade the stock will bounce. It sells for 70% of revenue, 60% of book value and a P/E of eight.

Apache is back to its mid-2009 recession price. With three billion barrels of oil equivalent reserves, it's as solid as they come when it comes to oil and gas exploration and production companies. It's cheaper than its peers at 8.1 times trailing earnings and four times what I think it should earn in 2013.

Brazil's Tam is South America's top-of-the-line airline, with 98 destinations, mostly inside burgeoning Brazil. Its reputation is so good it can actually charge premium prices. Yet the stock sells at only 40% of annual revenue and five times my estimate of 2011 earnings. Its 2011 dividend yield is nearly 4%.