Will the True State of the US Economy Please Stand Up?
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The second guesstimate by the Bureau of Economic Analysis (BEA) of Q3:2023 real Gross National PRODUCT’s annualized growth came in at 5.2%, up from the first guesstimate of 4.9%. Along with these data, the BEA reported its first guesstimate of annualized growth in real Gross Domestic INCOME (GDI) , 1.5%. In theory, both GDP and GDI should be the same. Both represent the value of goods and services produced in the economy. GDP calculates this value by adding up the value of expenditures in the economy – personal consumption, business expenditures, including the change in inventories, government expenditures and the change in net exports. Income is earned by some entities for the production of goods and services. So, GDI is the sum of wages, profits, interest income, rental income and taxes minus production/import subsidies.
As I mentioned above, in theory, real GDP and real GDI should be the same. But, in practice, they are not. Plotted in Chart 1 are the quarterly observations of the year-over-year percent changes in real GDI (blue line) and real GDP (red line) from 2010 through Q3:2023. Also plotted in Chart 1 are the quarterly observations of the percentage point differences between the year-over-year percent changes in real GDI and real GDP (the green bars). Notice that in the three quarters ended Q3:2023, these differences have widened out considerably, widened out to the negative side. The median difference from Q1:2010 through Q4:2022 has been 0.09 percentage points. That’s close enough for government work for saying real GDI and real GDP, as separately calculated, are the same. But in the four quarters ended Q3:2023, the median difference has been negative 1.97 percentage points. In Q3:2023 by itself, the difference between the year-over-year percent change in real GDI and real GDP was minus 3.16 percentage points, the widest absolute difference between changes in real GDI and real GDP in the period staring in Q1:2010 through Q3:2023. Granted, the real GDI data point for Q3:2023 is the BEA’s first guestimate of it.
Chart 1
So, growth in the US economy looks a lot weaker in terms of real GDI than it does in terms of real GDP. Is there any other data that could help us determine whether real GDI or real GDP represent the true state of the economy? Of course there is or I wouldn’t have posed the question. Let’s take a look at the behavior of the Chicago Fed National Activity Index (CFNAI). The CFNAI is a weighted average of 85 existing monthly indicators of economic activity drawn from the four broad categories of production and income, employment, unemployment and hours worked, personal consumption and housing and sales, orders and inventories. The CFNAI is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index corresponds to growth above trend and a negative index corresponds to growth below trend.
Let’s compare the behavior of the CFNAI with real GDI and real GDP growth in recent years. Plotted in Chart 2 are quarterly observations of year-over-year percent changes in real GDI (the blue line) and real GDP (the red line). Also plotted in Chart 2 are quarterly observations of the four-quarter moving average of the CFNAI (green bars). In Q4:2023, a divergence between growth in real GDI and real GDP growth begins and continues through Q3:2023 with real GDP growth far outpacing real GDI growth. But notice, the slow growth in real GDI is consistent with the negative readings in the four-quarter moving average of the CFNAI.
Chart 2
Of course all of these data are subject to revisions. But with the confirmation coming from the negative readings in the CFNAI, indicating below-trend growth in economic activity, it would appear the approximately zero year-over-year percent change in real GDI since Q4:2022 offers a truer representation of the state of the US economy than do year-over-year percent changes in real GDP.
Paul L. Kasriel
AuthorMore in Author Profile »Mr. Kasriel is founder of Econtrarian, LLC, an economic-analysis consulting firm. Paul’s economic commentaries can be read on his blog, The Econtrarian. After 25 years of employment at The Northern Trust Company of Chicago, Paul retired from the chief economist position at the end of April 2012. Prior to joining The Northern Trust Company in August 1986, Paul was on the official staff of the Federal Reserve Bank of Chicago in the economic research department. Paul is a recipient of the annual Lawrence R. Klein award for the most accurate economic forecast over a four-year period among the approximately 50 participants in the Blue Chip Economic Indicators forecast survey. In January 2009, both The Wall Street Journal and Forbes cited Paul as one of the few economists who identified early on the formation of the housing bubble and the economic and financial market havoc that would ensue after the bubble inevitably burst. Under Paul’s leadership, The Northern Trust’s economic website was ranked in the top ten “most interesting” by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets (McGraw-Hill, 2002). Paul resides on the beautiful peninsula of Door County, Wisconsin where he sails his salty 1967 Pearson Commander 26, sings in a community choir and struggles to learn how to play the bass guitar (actually the bass ukulele). Paul can be contacted by email at econtrarian@gmail.com or by telephone at 1-920-559-0375.