Interesting note from Deutsche Bank’s Joe Lavorgna (yes) ahead of tomorrow’s GDP revision:——–
We get the final revision to Q2 real GDP this morning, although technically it is not “final” as the data will remain prone to revision next year when the Bureau of Economic Analysis (BEA) conducts its annual revisions. Recall what happened on July 29: we learned that Q4 2010 and Q1 2011 real GDP were much weaker than what had been previously reported: Q4 2010 GDP was revised down to +2.4% from +3.1%, and Q1 2011 real GDP was revised down to +0.4% from +1.9%. Moreover, the BEA reported Q2 real GDP at +1.3%—it has been revised down to +1.0% since then. A much weaker growth profile along with weakening momentum was a catalyst for the risk off trade in global financial markets. Investors have rightly worried about the possibility of recession given the fact that H1 real GDP averaged less than 1%. But what if the economy actually was not as weak in the first half of the year as the GDP data suggest? Interestingly, the income side of the economy suggests this could be the case.
Along with GDP , the BEA also publishes GDI or gross domestic income. In theory, nominal GDP and nominal GDI should be equal, as the former represents the expenditure side of the economy, and the latter represents the income side of the economy. When a household or business spends money, it counts in GDP. That money, however, is income to the entity receiving it. In practice, there are large differences quarter to quarter in the performance of GDP and GDI. This is known as the statistical discrepancy. For example, in Q1 2011, nominal GDP grew +3.1% compared to +5.2% in nominal GDI. In Q2 2011, nominal GDP grew +3.5% compared to +4.1% in nominal GDI. If we assume the income data are more accurate—more on this below, then it would imply real GDP gains of +2.5% and +1.6% in Q1 and Q2 2011, respectively. Note that we are assuming an unchanged GDP deflator.Why might the income data be better? The income data are based on tax receipts, and we know that households and businesses do not pay taxes on phantom income.
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