There may be an explanation why the US economy has been remarkably resilient and growing rapidly despite high inflation and interest rates.
Maybe it’s not so flexible after all.
this week, Department of Commerce The bank revised its forecast for economic growth in the third quarter to an annual rate of 5.2%. This is the fastest expansion in the country’s gross domestic product — the value of all goods and services produced in the United States — since the fall of 2021, when the country was still full of pent-up demand after the pandemic.
But a lesser-known measure of the economy tells a very different story.
Gross domestic income rose at an annual rate of just 1.5% from July to September, and its growth has been weak over the past year even though GDP has advanced strongly. Over the past four quarters, GDP rose 3% while GDI fell 0.16%, according to an analysis of trade data by Joseph LaVorgna, chief economist at SMBC Nikko Securities.
This is the largest discrepancy between the two measures in recent memory.
The overall level of GNI is also 2.5% lower than GDP, the biggest gap since 1993, says Jonathan Millar, an economist at Barclays.
LaVorgna says Gulf Drilling International is doing a better job of picking up early signs of the recession that many economists believe will hit the United States next year.
“I think GDP overstates the strength of the economy,” LaVorgna says.
The debate about which economic measure is best is not just an academic debate. The Fed may want to see the economy cool down before deciding that inflation is falling enough that it does not have to raise interest rates again.
What is the difference between GDP and GDI?
GDI is an alternative way to measure economic output. GDP calculates all spending by businesses, consumers, foreign companies and the government by surveying retailers, auto dealers, manufacturers and others.
GDI values all income in the form of wages, salaries, corporate earnings, interest, dividends, and rents.
In theory, the two metrics should add up to exactly the same total because every dollar one person spends is another person’s income. But in reality, they often diverge because the data are collected through different surveys from different sources and both are subject to sampling error.
Over time, GDP and the GI tend to converge either because one measure catches up with the other or because of revisions that affect both GDP and the GI, LaVorgna and Millar say.
GDP is the most popular way to measure the temperature of the economy. This is partly because the first Q4 GDP estimate was released weeks before the first GDI estimate, LaVorgna points out. GDP provides a more detailed analysis of components of the economy, such as consumer spending, business investment, and housing construction.
Is there a better indicator than GDP?
But Jeremy Nalewick, a former Fed economist, says the GII may be a better measure. He noted that preliminary estimates of the Global Growth Index are closer to the final estimates for both measures than the early figures for GDP, according to the 2016 report. paper By the Federal Reserve Bank of St. Louis.
The GDI is also better at predicting recessions, says Barclays’ Millar.
One reason the GDI might be more accurate, LaVorgna says, is that instead of just surveying companies, it relies on hard data like unemployment insurance claims to measure wages and salaries.
LaVorgna says the GDI is particularly more reliable during big transitions, or inflection points, when an economy moves from a period of strength to weakness or vice versa. He says this is the case now.
Is the United States approaching a recession?
After growing at an average annual rate of 3.2% over the past three quarters, the economy is expected to expand 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, a decline from previous estimates but still historically high.
Why?
The Fed’s aggressive interest rate hikes since early last year are finally poised to have a bigger impact on consumer and business spending, and low- and middle-income households have largely exhausted their coronavirus-related savings from stimulus checks and sheltering-in-place. Many economists say.
What is the current state of the labor market?
LaVorgna says the weak GGI numbers are also 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 early this year, and the unemployment rate has risen from a 50-year low of 3.4% to 3.9%.
However, Millar says these types of job numbers are still strong, and coupled with strong consumer spending numbers, despite some decline in October, are far from indicating a recession.
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At the same time, he says it has been difficult to gauge corporate profits recently due to sharp swings in energy costs and other prices, and turmoil among regional banks due to bond losses caused by rising interest rates.
In the current environment, “I prefer GDP,” Millar says.
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