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As We Look For Positives In The Economy

GDI vs GDP

When GDP gets released tomorrow we’ll know if we are in a recession or not, however with the divergence of GDP from GDI (Gross Domestic Income), it may not be as severe as others

Gross domestic product gets the most headlines and currently says the economy shrank in the first three months of the year. The other, gross domestic income (GDI), says the economy actually grew.

Why it matters: The problem will come to a head tomorrow, especially if GDP does turn out to show contraction for a second straight quarter.

That will heighten the recession debate. But with gangbuster job creation, economists aren’t even sure if the activity was as weak as first-quarter data suggests.

How it works: GDP adds up all spending in the economy. Yet the GDI gauge sums up income — wages, business profits, or interest payments — as the name suggests.

In theory, the measures should be equal. What one person spends is another person’s income, after all. But in practice, the different data sources mean they can diverge or even be at odds with each other. Right now, the gap has never been wider.

“GDI squares better with some parts of activity that we know. It’s hard to understand how we could be adding close to 400,000 people each month on payrolls and then not [be] producing stuff,” says Vincent Reinhart, chief economist at Dreyfus and Mellon.

By the numbers: Real (inflation-adjusted) GDI has outpaced that of GDP since the end of 2020. On an annualized basis, the divergence hit a record $676 billion.

The end result is two pictures of the economy’s health: GDI rose at a 1.8% annualized pace, while GDP fell at a 1.6% annualized pace.

Future revisions, which continue years after the data is first released, may eventually bring the two gauges more in step. For now, the Biden administration expects the divergence to continue.

“This year’s first quarter growth was likely favorable when looking at income, employment and overall production. Looking forward, initial reads on the income data suggest this growth continued into the second quarter,” Treasury Department officials wrote this week

So which measure should get more weight? The unsatisfying answer is both. Economists — including the official arbiters of a recession — like to look at an average of the two.

Research by former Fed economist Jeremy Nalewaik found that since the 1990s, initial GDI growth estimates tend to predict eventual revisions to GDP.

What’s next: Perhaps the most appealing feature of GDP is timeliness. A read on how the economy fared during Q2 — the first estimate, anyway — is due tomorrow.

Axios Macro By Neil Irwin and Courtenay Brown · Jul 27, 2022

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