Gross domestic income, a GDP alternative, warns of possible recession – USA TODAY

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US data: GDP grows 4.9%, jobless claims rise to 210,000

U.S. gross domestic product rose to an annual rate of 4.9%, more than twice as fast as in the second quarter, beating estimates.

Bloomberg

There may be an explanation as to why the U.S. economy has been remarkably resilient and growing strongly despite high inflation and interest rates.

Maybe it’s not so resilient after all.

This week, the Commerce Department raised its estimate of economic growth in the third quarter to an annual rate of 5.2%. That’s the sharpest increase in the country’s gross domestic product — the value of all goods and services produced in the U.S. — since fall 2021, when the country was still brimming with pent-up demand following the pandemic.

But a much lesser-known measure of the economy tells a very different story.

Gross domestic income (GDI) rose at an annual rate of just 1.5% in the July-September period and grew only weakly last year despite solid GDP growth. GDP rose 3% over the past four quarters, while BDI fell 0.16%, according to an analysis of trading data by Joseph LaVorgna, chief economist at SMBC Nikko Securities.

This is the largest discrepancy between the two metrics in recent memory.

The overall level of BDI is also 2.5% below GDP, the largest gap since 1993, says Barclays economist Jonathan Millar

LaVorgna argues that the GDI is better at detecting the early signals of a recession that many economists believe will hit the U.S. next year.

“I think GDP exaggerates the strength of the economy,” LaVorgna says.

The debate over which economic measure is better is not just academic. The Federal Reserve may want to wait for the economy to cool before deciding that inflation is falling enough that it doesn’t need to raise interest rates again.

What is the difference between GDP and GDI?

The GDI is an alternative method for measuring economic performance. GDP tracks all spending by businesses, consumers, foreign companies and the government through a comprehensive survey of retailers, car dealers, manufacturers and others.

GDI estimates all income in the form of wages and salaries, corporate profits, interest, and dividends and rents.

In theory, the two measures should add up to exactly the same amount because every dollar someone spends is someone else’s income. In reality, however, they often differ from each other because the data are collected through different surveys from different sources and both are subject to sampling errors.

Over time, GDP and GDI tend to converge, either because one measure catches up with the other or because revisions affect both GDP and GDI, LaVorgna and Millar say.

GDP is by far the more popular method of measuring economic temperature. That’s partly because the first GDP estimate for the latest quarter is released weeks before the first GDI estimate, LaVorgna notes. And GDP provides a far more detailed breakdown of economic components such as consumer spending, business investment and housing construction.

Is there a better indicator than GDP?

But Jeremy Nalewaik, a former Federal Reserve economist, says the GDI could be a better barometer. According to a 2016 paper from the Federal Reserve Bank of St. Louis, he pointed out that the initial BDI estimates are closer to the final estimates of both measures than to the early GDP numbers.

He concluded that GDI was also better at predicting recessions, says Barclays’ Millar.

One reason GDI may be more accurate is that it relies not just on company surveys but on hard data like unemployment insurance claims to measure wages and salaries, LaVorgna says.

GDI, says LaVorgna, is particularly more reliable during major changes or turning points, when the economy moves from a period of strength to a period of weakness or vice versa. That’s the case now, he says.

Is the USA at risk of a recession?

After averaging 3.2% annual growth over the past three quarters, the economy is expected to grow less than 1% in the current quarter and 1.2% next year, according to economists surveyed by Wolters Kluwer Blue Chip Economic Indicators . Economists believe there is a 47% chance of a recession in the next 12 months. That’s lower than previous estimates, but still historically high

Why?

The Federal Reserve’s aggressive interest rate hikes since early last year are finally set to take a greater toll on consumer and business spending, and low- and middle-income households have largely depleted their COVID-related savings through stimulus checks and sheltering at home. say many economists.

What is the current situation on the job market?

LaVorgna said the poor GDI numbers are also more consistent with a labor market that has slowed significantly this year and consumer confidence that remains historically low despite a rise in November. Average monthly job growth has fallen from about 300,000 to 200,000 since the start of this year, and the unemployment rate has risen to 3.9% from a 50-year low of 3.4%.

However, Millar says these types of employment numbers are still stable and, coupled with strong consumer spending, are far from a signal of recession, despite some moderation in October.

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Meanwhile, it has been difficult to measure corporate profits recently because of sharp fluctuations in energy costs and other prices, as well as turmoil at regional banks due to bond losses caused by high interest rates, he says.

In the current environment, “I would prefer GDP,” Millar says.


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