Not exactly timely, Bloomberg notes “The widening gap between gross domestic income and gross domestic product is a worrying signal.”
GDP vs GDI Chart Notes
- Real means inflation adjusted
- GDP is Gross Domestic Product
- GDI is Gross Domestic Income
- Real Final Sales is the bottom line assessment of GDP. It excludes inventories which net to zero over time.
GDI was negative for two consecutive quarters and has been weaker than GDP for four quarters. GDI is now positive, but it is subject to greater revisions than GDP.
Bloomberg opinion columnist Aaron Brown says Summer’s End Is Ushering In a Recessionary Chill, emphasis mine.
In theory, GDP and GDI measure the same thing — the total value of goods and services produced in a geographic area and sold to end-users at arms-length prices during a quarter — but in different ways. If the economy had a single cash register, GDP would measure the money coming into the till, GDI would measure where the money went — to wages, supplies, taxes, interest, dividends or left in the till for owners and stockholders. But since the economy has billions of transactions, many complex and not all captured in official numbers, GDP and GDI have different measurement errors, and thus different values. They’re usually pretty close, however, differing by 0.8% on average.
Using two successive down quarters as the signal for recession, from 1947 to 1973 GDP and GDI agreed all but once. They both signaled four recessions at the same times, and they both missed the 1961 recession. GDP did give one false alarm in 1947.
Since 1973, however, GDI has done much better. Four times it signaled recession before GDP and once it caught a recession that GDP missed. Twice the two triggered at the same time, and once GDP gave a false alarm.
There’s been more news recently suggesting that a recession began at the end of 2022. Second-quarter GDP growth was revised down. Job openings are plunging. The labor leverage ratio — the proportion of workers quitting to those let go by employers — is falling as well, suggesting workers fear a weak job market and have little power to get increased wages. Corporate profits are falling as well. If current trends continue, and if GDP declines a significant share of the roughly 1.5% needed to fall in line with GDI, the economic numbers released from late September through October could well prompt the NBER to announce a recession.
This has three main implications, two political and one economic. Politically, NBER declaring a recession would support the Republican story that the Biden administration hurt the economy and denied obvious economic reality for three years to push left-wing policies. It would make Democratic painting of Bidenomic prosperity seem hollow or even dishonest.
I have been talking about the GDP vs GDI discrepancy, negative revisions, the discrepancy between jobs and employment, corporate profits, and the job leverage ratio for months, and in far more detail. Let’s take a look at some of my recent posts.
Negative Revision to 2nd Quarter GDP, Huge Discrepancy with GDI Continues
The lead chart and the second chart are from my post Negative Revision to 2nd Quarter GDP, Huge Discrepancy with GDI Continues
Real GDI peaked in the third quarter of 2022.
Discrepancy Between Jobs and Employment
Payrolls vs Employment Gains Since May 2022
- Nonfarm Payrolls: 4,377,000
- Employment Level: +3,185,000
- Full Time Employment: +1,446,000
- Only 45.4 percent of the employment gains for the last 15 months was full time employment.
Jobs Rise by 187,000 But 110,000 Negative Revisions and Unemployment Soars by 514,000
On September 1, I noted Jobs Rise by 187,000 But 110,000 Negative Revisions and Unemployment Soars by 514,000
Accounting for negative revisions, jobs effectively increased by 77,000 while unemployment surges as people looking for work can’t find it. Bloomberg labeled this “Goldilocks”.
Unemployment rose by 514,000. Over half a million people wanted jobs but couldn’t find them.
Full time employment is down by 150,000 since January of 2023.
Here is a blurb I have posted in my monthly jobs reports for eight straight months.
Because of annual benchmark revisions, the way the BLS reports revisions, and the relatively small sample sizes of monthly jobs reports, we cannot, with strong confidence, suggest these reports portray an accurate picture of either jobs or employment.
Of the 894,000 rise in employment in January, 810,000 was due to annual benchmark revisions. And the BLS does not say what months were revised, just poof, here you go.
The monthly jobs report by the BLS samples a mere 6 percent of jobs. The Quarterly Census of Employment and Wages (QCEW) payroll employment data represents 95 percent of the data.
The BLS will not incorporate March of 2023 until January of 2024. Lovely.
The Labor Leverage Ratio, a Measure of Wage Bargaining Power, Is in Retreat
The BLS comments “the quits rate can serve as a measure of workers’ willingness or ability to leave jobs.”
The LLR is a refinement to the quits rate.
I have commented on labor leverage several times this year, most recently in The Labor Leverage Ratio, a Measure of Wage Bargaining Power, Is in Retreat
Philadelphia Fed GDPplus Measure Sure Looks Like Recession Started in 2022 Q4
The Philadelphia Fed has a measure called GDPplus that’s a blend of GDP and GDI, not an average. It appears to lean more heavily on GDI.
In 100 percent of the cases, with no false signals, no misses, and no lead times more than two quarters, every time GDPplus had two consecutive quarters of negative growth, the economy was in recession.
On closer inspection, all but once, and the exception was a mere -0.1 percent, every time GDPplus had one quarter of negative growth, the economy was or would soon go into recession. By soon, I mean within two quarters.
GDPplus accurately forecast the 1961 recession but GDP and GDI both did.
GDPplus Recession Signals
GDPplus Recession Signals Synopsis
- GDPplus signaled every recession
- GDPplus was on time 4 times, early by a quarter 3 times, and early by 2 quarters twice.
This makes it appear as if GDPplus is a leading indicator. It isn’t because the data is heavily revised.
The BEA makes revisions frequently, especially on GDI. Since GDPplus is more reliant on GDI, it also has significant swings. However, GDPplus is the best recession indicator yet.
One quarter is sufficient and barring positive revisions to GDI and by implication GDPplus, the economy went into recession in the fourth quarter of 2022.
For more discussion of GDPplus, please see Philadelphia Fed GDPplus Measure Sure Looks Like Recession Started in 2022 Q4
Mainstream media is finally waking up to these discrepancies, albeit without any detailed analysis.
It’s quite possible a recession has come and gone. The NBER already had one instance of declaring a recession after it was over so don’t be surprised if it happens again.
It’s possible that a recession has come and gone with an interlude due to Inflation Reduction Act inflationary Nonsense.
If so, expect a rare double dip.
a degenerate political punter comment explains a great deal of our fiscal and moral dilemma. “Top Republican warns US not to ‘go wobbly’ on Ukraine
Helping Kiev means weakening “strategic adversary” Russia, Senator Mitch McConnell has said
This is a prime example of what’s running the West, degenerate indoctrinated feeble minded old men, who are on their last legs, and don’t care about who or how many die as they’re about to die anyway, and the apathy of the average citizen standing by letting it unfold means they are fully complicit in all of this.
For the record, I read MishTalk regularly and the commentary did influence my column–not directly or specifically enough to merit a citation, but it did help shape my thinking, along with my own analysis of the numbers and reading other analyses.
I think you’re a bit unfair about the “mainstream media.” It’s not as if all commentators were asleep for two years and suddenly awoke to notice the GDP/GDI discrepancy. There’s a lot of news to cover, and not a whole lot of general interest in even mildly technical discussions of economic aggregates. People who are interested in that stuff read MishTalk or other blogs. Only a few times a year is a story about economic numbers–beyond simple announcement and immediate implications–salient enough to address in general business news feeds.
Another unkind cut is “albeit without any detailed analysis.” MishTalk has unlimited space to address a sophisticated audience. A typical mainstream column is 700 words. After necessary material to introduce the topic, explain why general business readers should care and describe the basics–maybe 100 words are left for analysis. How detailed can it be?
seems like mish is grasping at recession straws. inflation is cumulative and the complaint of everyone. i still don’t know anyone who is out of work. amerikans slowing on buying junk is really not anything i would remotely call recessionary. seems legit and proper and righteous and a good thing. FFS amerikans shop to much. sell an auto and take a walk for your mental and physical well being.
someone above mentions AI taking unskilled jobs away (and that’s certainly true). think fast food chains and customer service jobs. but the rest of us are hardly safe from it. it’s always a race to the bottom in this country. a few make it big and the rest of us hope our job isn’t getting downsized. i think we need a bit more fettered capitalism.
1) Millions of beaten men and women from beaten places crossed the southern border. They are overwhelmingly unskilled. Gen Z and the millennial wouldn’t like to work or mingle with them.
2) Many people believe that these new immigrants are not absorbable. AI will
evaporate many unskilled jobs.
3) Millions in the black market and the job market will do whatever it takes to survive
== > deflation. SF and NYC are the ground zero for homeless people, drugs, crime and poverty.
Today, an article on the mayor of Casper, Wyoming, lamenting the homelessness problem and the damage they are doing to the city’s infrastructure.
It gets very, very cold in Casper in the winter.
So we had the recession and it’s already over. Good, that was painless.
Well politicians tend to take credit when the economy is good and blame others when its bad. Imo opinion the economy for the most part just chugs along reacting to market forces. How much of the current economy is affected by the boomers retiring. How much is covid bounce back. How bought construction from disasters and such. Fed printing money. .
Maybe the green agenda is inflationary. But hey in the long run it might be cheaper than doing. Whats the saying. You can pay now or more later.
“Well politicians tend to take credit when the economy is good and blame others when its bad.”
Success has many fathers and failure is an orphan.
This applies to more than just politics. It happens in pretty much any company, sports team etc.
How does black market income and people working under the table affect these numbers. I would assume it boosts GDP and understates GDI.
I have a smaller measurement system, albeit it’s pretty good.
I sell certain discretionary products on eBay and other platforms. The sales are well into the six-figures.
The fourth quarter of 2022 definitely was different, neaning much lower,
and the first and second quarters of 23 continued the downward trend.
I see discretionary spending as a great early indicator and it is definitly screaming lower economic activity and as you meantioned it ain’t over yet.
less junk bought and sold seems like a positive for a brutal consumer indebted empire.
“I see discretionary spending as a great early indicator ”
I use restaurants and Starbucks as an indicator. I remember the recession of 2007-08 where credit was scarce. The restaurants were empty and even the Toyota dealer. Most live on credit and use it for discretionary purchases!
When retirees and people on disability spend their SS checks it appears in the GDP.
And if what you say is true then GDP should always be higher than GDI but clearly that’s not the case. The $150b/month (and growing) *should* distort these numbers but they magically never show up.
Why would GDP always be higher than GDI?
It’s possible that the savings from present workers nets out to the spending of the transfer payments (SS and the like). Some years there may be more outflow (GDI higher) and some years more inflow (workers saved more than transfer payments spent).
“I have been talking about the GDP vs GDI discrepancy, negative revisions, the discrepancy between jobs and employment, corporate profits, and the job leverage ratio for months, and in far more detail. Let’s take a look at some of my recent posts.”
I have too and one of the things missing here is the social security payments (medicare too but I don’t have numbers for that). The average SS check in 2023 is about $1700 /month and there are 71m people on social security which equates to $120 billion/month in “income” for SS recipients. Where does this show up in GPD or GDI?
How does this impact the distortions? What happens 10 years from now when there are 80 million on SS?
According to this link SS is not included in GDP so how do we account for than $120 billion + Medicare + other social programs?
https://www.investopedia.com/ask/answers/082415/are-social-security-payments-included-us-gdp-calculation.asp
Not sure which part of the link about how it’s counted you don’t quite understand.
Technically SS payments are savings from prior years that went unspent in those years. If someone gets their SS payment and doesn’t spend it, it still doesn’t show up in GDP till they spend it.