TBO.com - TBO is Tampa Bay Online

For Recognizing A Recession, A Gut Check Can Out-Perform Statistics

ADVERTISEMENT

By CAROLINE BAUM

Bloomberg News

Published: September 9, 2008

Every quarter, the Bureau of Economic Analysis publishes two estimates, arrived at differently, of how the economy performed in the previous three months. One of them gets next to no attention - a nonissue except at times such as the present when the two are sending conflicting messages.

Gross domestic product measures the value of final goods and services produced in the United States. It is calculated as the sum of expenditures. GDP equals consumption plus investment plus government spending plus exports minus imports. GDP garners all the headlines.

Gross domestic income is, as the name suggests, the sum of the income generated from the output of goods and services. It includes employee compensation, proprietors' income, rental income, corporate profits and net interest. GDI doesn't make the nightly news. It is of interest solely to economic professionals.

In theory, GDP should equal GDI. In practice, it rarely does.

The Bureau of Economic Analysis reconciles the two measures in much the same way you and I reconcile checkbooks with bank statements: Subtract one from the other, draw a line and label it "statistical discrepancy." (OK, so we don't give it a fancy name.)

In the past six quarters, the gap between the two has gone from negative $195 billion (GDI bigger than GDP) to positive $112 billion (GDP bigger than GDI). The swing of more than $300 billion is "breathtaking," according to Bob Barbera, chief economist at ITG Inc., a New York brokerage. "We have no employment, no income and a jump in output. It's like the virgin birth."
Credibility Gap
There are lots of reasons the two measures yield different results. For example, corporate profits are available from the Internal Revenue Service with a two-year lag. The Bureau of Economic Analysis has other sources for estimating profits, including quarterly financial reports, but the real numbers aren't available until two years after the fact.
Real GDP rose a revised 3.3 percent in the second quarter, according to the bureau. That's well above the 20-year average, not to mention the public's perception of the state of the economy. Nine-in-10 consumers think the United States is in recession, according to the Reuters/University of Michigan Survey of Consumers for August.

Employment, one key indicator of consumer well-being, has been falling for eight months (nine, if you exclude government jobs). The bureau revised down wage and salary growth for the first half of the year, implying bigger job losses when the Labor Department reconciles its estimates with comprehensive state unemployment insurance data, according to Doug Lee, president of Economics from Washington, an independent consulting firm in Potomac, Md.

The unemployment rate shot up 0.4 percentage point to a five-year high of 6.1 percent in August. House prices, stock prices and inflation-adjusted incomes are all falling. "The real GDP data don't speak to that weakness," Barbera says. "Another set of aggregate statistics do."

That would be GDI. Real GDI rose 1.9 percent last quarter after two quarterly declines. This income-based measure shows the economy growing 0.3 percent in the past year.

If you gave consumers a multiple-choice quiz and asked them which measure reflected the true state of the economy, there's no question they'd answer GDI.

That's true of many professionals, too.

"It's not just that the two measures are telling a different story," says Conrad DeQuadros, senior economist at RDQ Economics LLC, an independent research firm in New York. "The income-based measure squares much better with the employment data."

Making The Case For GDI

In a recent research note, DeQuadros and RDQ Economics' chief economist John Ryding present their case for GDI.

Exhibit No. 1 is the rise in the unemployment rate to 5.9 percent in the third quarter from 4.9 percent in the first. Why is unemployment rising at such a rapid pace if the economy's growing at 3-plus percent? Has potential growth risen enough to produce that much slack? Doubtful.

Exhibit No. 2 is trade, which added 3.1 percentage points to second-quarter growth, the biggest contribution since 1980. Almost half the boost came from declining imports, hardly a sign of a robust U.S. economy. Only once since 1970 has a large addition to growth been caused by falling from imports occurred outside recession, Ryding and DeQuadros say.

Exhibit No. 3 is the tiny increase in the second-quarter GDP deflator, or the inflation measure used to adjust nominal growth. The 1.3 percent increase in the deflator was "held down by the surge in imported oil prices," which are subtracted from GDP, the economists write. Most people would not read that as a "plausible" reflection of the past quarter's inflation rate.
Bureau of Economic Analysis economist Bruce Grimm doesn't assign an edge to either. He did find in a 2005 study that "real GDI generally, but not always, declines more than real GDP during recessions."

That may be why "real time GDI has done a substantially better job recognizing the start of the last several recessions than has real time GDP," according to a paper by Federal Reserve Board economist Jeremy Nalewaik.

And it would certainly go a long way toward explaining 3.3 percent real GDP growth in a period that walks and quacks like a recession.

Share this:

Loading Comments...

Email Print

ADVERTISEMENT