Everyone is still digesting the unexpected downward revision to Q1 GDP growth to 1.8% from an earlier estimate of 2.4%.
High Frequency Economics’ Jim O’Sullivan is convinced that the number is missing some information, and it’s likely to be revised up next month.
In a note today, he points out that gross domestic income — which takes into account wages and profits — has outperformed GDP, which suggests there’s something wrong with the GDP number. Here’s the chart:
Here’s O’Sullivan’s comment (emphasis added):
As noted above, real GDI—gross domestic income—still shows a 2.5% annual rate of increase in Q1, stronger than the 1.8% reported for real GDP. The differential was even larger in Q4, with real GDI up at a 5.5% pace, versus 0.4% for GDP. GDP was up more than GDI in the prior two quarters, but the net result is a bit more strength in real GDI than real GDP in the past year—real GDI is up 2.2%, real GDP just 1.6%. We suspect GDP has been undercounted. Tax receipts and employment growth have also suggested possible undercounting. The next GDP report, in late July, will include the annual revision.
One Fed economist has argued GDI is a more accurate depiction of economic performance, according to the FT’s Cardiff Garcia. It signaled an economic slowdown in the middle of 2007 even as GDP kept climbing, and early GDI estimates also produced more accurate reflections of the severity of the recession.
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