Viewpoints: November 2023

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.

I don’t have access to the Blue Chip survey of economists’ forecasts of various economic data anymore, so I can’t answer my question. But I do have access to consumers’ inflation forecasts and these forecasts are terrible. Plotted in the chart below are monthly observations of consumers’ forecasts of year-ahead inflation as reported in the University of Michigan Consumer Sentiment Survey (the blue bars). Also plotted in the chart are monthly observations of the actual (until revised) year-over-year percent changes in the All-Items Consumer Price Index (the red line). The CPI percent changes are lagged such that they line up with month in which the consumers’ forecasts were surveyed. For example, in May 2020, consumers were forecasting that the year-over-year inflation rate in May 2021 would be 3.2% (the height of the blue bar in May 2020). As luck would have it, the actual CPI inflation rate turned out to be 4.9% (the height of the red line in May 2020). In October 2022, consumers were forecasting that the year-over-year inflation rate in October 2023 would be 5.0%. In fact, it turned out to be 3.2%. In the latest November survey, consumers are forecasting that inflation will be 4.5% in the 12 months ahead. Given that the sum of the monetary base plus commercial bank credit grew by only 0.7% in the 12 months ended October 2023, my bet is that the year-over-year percent change in the CPI in November 2024 will be much lower than 5.0%.

The Federal Reserve Bank of Philadelphia’s state coincident indexes in October were quite mixed, with the balance tilting toward weakness. A full 32 states show declines from September, with West Virginia’s reading down by 1 percent and Montana’s and Mississippi’s indexes falling more than .5 percent. Of the 18 states with increases, the largest was Nevada’s fairly moderate .33 percent. Over the 3 months ending in October, 16 states had declines, with West Virginia off 2.7 percent, and Montana and Mississippi dropping more than 1 percent. South Carolina and Maryland both increased roughly 1.3 percent over this period, which is not an especially large gain for states at the top Over the last 12 months Maryland had an impressive 7.4 percent increase, and Massachusetts and Vermont were up more than 6 percent. 3 states had increases of less than 1 percent, with New Jersey again at the bottom with a .2 percent reading.

The independently estimated national figures of growth over the last 3 months (.5 percent) and 12 months (3.0 percent) both look to be roughly in line with what the state figures suggest.

Part un was written by me way back on March 14, 2020. I should have paid more attention to my 2020 commentary so that I would not have thought that household spending would be less resilient as it has been so far in 2023. Moreover, I would not have called for a recession to commence in Q2:2023.

In Chart 1 below are plotted monthly observations of the M2 money supply as a percent of nominal Disposable Personal Income (DPI). From January 2015 through December 2019, the median value of this ratio was 91.8%. Then, after the federal government started writing Covid-aid checks to households and businesses, checks financed by the Fed and banking system, the ratio of M2 to DPI reached a high of 118.9% in January 2022. As of September 2023, the ratio had declined to 102.1%, much below its January 2022 high, but also materially above its 2015-2019 median value.

State labor markets were soft in October. Florida’s 28,400 increase (.3 percent) was the only statistically significant change in payrolls (California’s 40,200 gain was not seen as statistically significant). The number of states reporting point declines was comparable to the number reporting increases. The sum of the states’ payroll changes was only 43,800 (noticeably smaller than the national 150,000), the lowest such figure since December 2020.

26 states had statistically significant increases in their unemployment rates in October, though none were larger than .2 percentage point. Nevada continued to have the nation’s highest rate, at 5.4 percent while DC was at 5.0 percent. No other state had a rate more than 1 percentage point above the nation’s 3.9 percent, though California, Illinois, and New Jersey were higher than 4.5 percent. Alabama, Florida, Hawaii, Kansas, Maine, Maryland, Massachusetts, Montana, Nebraska, New Hampshire, North Dakota, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Virginia, and Wyoming, all had rates at or below 2.9 percent, with Maryland at 1.7 percent.

Puerto Rico’s unemployment rate fell t0 5.8 percent, and the island’s payrolls increased 2,800.