The stock market's stunning gains in the last year make it easy to assume these must be the best of times for the U.S. economy. But government GDP figures tell quite a different tale, according to AP. It is a good lesson in economics. Wall Street's surge is being fueled by stronger-than-expected corporate profits, which assess how business is going here and abroad. Gross domestic product, in turn, only tracks U.S economic activity and does so by a different yardstick. The result: The Standard & Poor's 500 index is trading at record levels after more than a 20 percent climb since last summer, while GDP growth is expected to slow to a mere 2 percent for 2007 _ the weakest in five years. In a note titled «The Equity Market Ain't the Economy,» the economics team at Goldman Sachs points out that corporate profits and sales include all business no matter where they are generated. That makes a big difference when you consider that nearly 50 percent of total S&P 500 company sales now come from abroad, according to Howard Silverblatt, senior index analyst at S&P. With economic growth overseas outpacing what is seen in the United States, and a weak dollar making foreign profits of U.S. companies more valuable, that has fueled corporate America's top and bottom lines. «International business has become an equal partner to U.S. sales for many companies and that has been helping to drive profits higher,» said Silverblatt, who said foreign sales boosted first-quarter earnings for S&P 500 companies to a better-than expected 8.2 percent gain. GDP, on the other hand, refers to the value added to goods produced just in the United States. For instance, a company that sells a car for $20,000 (¤14,865) with $10,000 (¤7,433) worth of parts from subcontractors would only have created $10,000 in added value, according to Goldman Sachs. Real GDP, which is considered by economists the best gauge of activity, is adjusted for inflation, while corporate profits are not. The higher the inflation rate, Goldman Sachs says, the bigger the likely gap between corporate results and GDP growth. Economic activity is also tracked on a quarter-on-quarter annualized rate, differing from the year-over-year results that are typically used to analyze corporate profits. At the same time, the makeup of the S&P 500 does not reflect the current economic climate, even though it has long been considered an economic bellwether. While the S&P 500 is heavily weighted in manufacturing, finance, retail and utility stocks, GDP's larger components include real estate, health care, professional services and construction. Consider that just over 10 percent of the S&P 500's market value is weighted in energy stocks, such as Exxon Mobil Corp. and Chevron Corp., which have watched their profits surge amid the boom times in oil prices in recent years. Shares in that sector are up more than 14 percent since last summer, when the recent surge in the stock market began. Another big portion of the S&P 500's market value is the thriving information technology and telecommunications sectors, which account for nearly 19 percent of the index. Those stocks have gained nearly 30 percent in the last nine months. On the flip side, the housing sector has a much smaller weighting, despite its influence on the economy lately. Not long ago, the housing market was leading the economy's growth, but the business has deteriorated over the last two years, with sales of new and existing homes plunging and the mortgage business seeing a dramatic change in lending standards. Home-improvement merchants, home-furnishings retailers and homebuilders account for about 12 percent of the S&P 500's market value, and have been lagging its returns since last summer. «The sectors making up the equity market, therefore, have been the 'choice cut' of the economy in the last year or two, benefiting from the energy boom and ducking the impact of the housing slump,» Goldman Sachs said in its report. This divide could narrow a bit should consumer spending take a turn for the worse in the months ahead. If Americans crimp their buying this summer as gas prices once again surge above $3 a gallon (80 cents a liter) at the pump, that could replace housing as the No. 1 drag on the economy. A severe spending pullback could also hurt corporate profits more than the housing collapse has done. That could knock some wind out of the stock market's sails.
