Move over GDP, GDI is the new and improved way everyone is measuring the economy.
GDP, or gross domestic product, is the most widely-cited measure for the economy’s overall health and trajectory. On Friday, we found out that the second estimate of GDP in the first quarter showed that the economy actually contracted 0.7% to start 2015.
But a number of Wall Street economists pointed to GDI, or gross domestic income, as giving us a better picture of what’s really going on out there.
In the first quarter, GDI rose 1.4%.
In a note to clients following Friday’s report, Kris Dawsey, an economist at Goldman Sachs, called GDI a “useful cross-check on the often-noisy quarterly GDP figures.” Over the prior year, real GDI — which is adjusted for inflation — rose 3.6% in the first quarter, which Dawsey noted is near the top end of the range seen during the post-crisis recovery.
Paul Ashworth at Capital Economics wrote that, “We would view [GDI] as a much more accurate gauge of the economy’s true performance over the [first] three months of this year.”
And in comments following Friday’s report, Jason Furman, Chairman of the White House’s Council of Economics Advisors, also highlighted the solid GDI print and noted that starting in July, the Bureau of Economic Analysis will publish an average of GDP and GDI.
This measure showed the economy grew 0.3% to start the year.
There is a question, of course, surrounding why GDI has become en vogue now, given that GDP has been the relied-upon measure of economic growth over many years by politicians and economic policymakers alike.
Sceptics would likely cite a desire by those (read: the government) who simply won’t acknowledge that the economy actually stinks to “move the goalposts,” changing the conversation to fit a narrative that is simply untrue.
But there are actual, substantive reasons for economists and market participants to focus on GDI rather than the traditional GDP number. In theory, the 2 numbers should be the same, as both are designed to measure the aggregate growth of the economy. GDP measures what the economy produces, GDI measures what it takes in.
But because they use different data sources, these readings are subject to measurement error, though the BEA notes they tend to follow similar paths over time.
A main difference in their inputs is tax receipts, with GDI taking into account taxes on production and imports, as well as subsidies, net interest, and miscellaneous payments.
(The first estimate of Q1 GDP was released on April 29; that reading showed the economy grew by just 0.1% to start the year.)
In the first quarter, US federal tax receipts increased by 8.6% over the prior year, which does not point to an economy heading for a recession or even a serious slowdown. In comparison, year-over-year tax receipts declined for 8 quarters during the financial crisis and were down on an annual basis for years after the 2001 recession.
The discussion surrounding the economy changed slowly during the first quarter and then all at once, as we chronicled last week.
The first reading on Q1 GDP, and subsequent reductions in expectations for Friday’s reading, was surprising to Wall Street and many in the economics community.
But a report last week said that the government is no longer sure it’s adjusting for the weather appropriately, something that Wall Street economists — notably Joe LaVorgna at Deutsche Bank — have been saying for some time.
Since the financial crisis, first quarter GDP has consistently lagged growth during the second, third, and fourth quarters. And the whole point of the government “seasonally adjusting” the data is to smooth out these variances and give markets and the public a more reliable, consistent picture of the country’s economic health. Given the repeated failures of the first quarter to be anything other than a disappointment, it seemed that something was off.
In a note to clients following Friday’s report, Lew Alexander and his team at Nomura noted that in the Minutes from the April FOMC meeting, the Fed noted that there was a recurring pattern in the seasonally adjusted first quarter GDP data. Alexander said this likely gives the Fed confidence to look through some of this year’s weakness.
The economy at large
This report, however, doesn’t show that the US economy is in boom mode.
On Friday, we also got manufacturing data from the American Midwest which was a major disappointment as well as a consumer confidence reading from the University of Michigan that declined sharply from the prior month. Things still aren’t perfect, and notably consumers aren’t entirely confident the economy is rebounding as the weather turns from winter to summer.
And over the last few weeks, we’ve noted that some on Wall Street were becoming compelled to say “recession” when talking about the US economy, while others were talking about the economy heading for a “great reset.”
And in a note to clients earlier this week, Goldman Sachs’ Kris Dawsey wrote that productivity trends indicate the long-run potential of the US economy may be closer to annual growth of 1.75%; previously, the firm had expected the economy would grow by 2.25% annually.
But after Friday’s report a few things are clear.
As currently tabulated, GDP was a big disappointment in the first quarter.
As currently tabulated, GDI showed an economy that is still growing.
And with lingering issues around how the government adjusts its GDP data, Deutsche Bank’s LaVorgna argued in a note on Friday, “the drop-off in estimated Q1 GDP growth has not altered our view that the underlying fundamentals of the economy remain on firm footing.”
So we can put away the panic buttons.
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