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On an Income Basis the Economy is Humming, GDP says No, Which is Believable?

There are two ways to measure the economy and they should lead to the same answer over time. Instead, we have the largest gap in history.
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GDP and GDI data from the BEA, chart by Mish

GDP and GDI data from the BEA, chart by Mish

GDP vs GDI

  • Gross Domestic Product (GDP) and Gross Domestic Income (GDI) are different measures of a nation's economic activity. 
  • GDI counts what all participants in the economy make (wages, profits, and taxes). 
  • GDP counts the value of what the economy produces (goods, services, and technology).
  • Real Final Sales (RFS) is a subsect of GDP that ignores changes in inventory which net to zero over time. Economists generally consider RFS to be the true bottom line measure of the economy.

There are usually slight differences between GDP and GDI but the fluctuations are normally random. 

Since the second quarter of 2021 GDI has been on a tear. The gap is really widening, especially compared to RFS. 

Which to Believe?

Those who think we are not in recession place a lot of faith in GDI. But what is so believable about GDI?

The debate goes like this. 

Recession Believers: Housing is crashing, real wages are declining, and real spending is at best stagnant. The yield curve is screaming recession. Target has warned three time, Walmart once, and the Fed is on a rate hike rampage. 

Recession Disbelievers: Jobs are strong and so is GDI. 

This one is not even close, but people will believe what they want. Jobs are a lagging indicator, and due to massive losses in the Covid recession, I fully expected a minimal rise in unemployment this recession. 

Still, I had no good explanation for the the GDP vs GDI discrepancy, until now.

Expect Big BEA Revisions

"I inquired and a BEA economist said (a) it’s probably mostly due to janky 2021/22 QCEW seas adj. caused by Covid weirdness; and (2) strongly hinted Sept will see big annual revision."

QCEW stands for Quarterly Census of Employment and Wages.

Index of Wages BLS vs BEA 

Index of Wages BLS vs BEA 2022-Q2

BEA data is quarterly and BLS data monthly. In the above chart the BLS Index of Wages is a quarterly average. 

Everything now fits together nicely. Even the alleged strength in jobs is not what it seems.

Increasingly Likely That Alleged Job Strength is a Mirage of Part Time Second Jobs

Full Time and Total Emploiyment vs Job Level 2022-08

Lat Friday I commented Increasingly Likely That Alleged Job Strength is a Mirage of Part Time Second Jobs

Since March, the BLS reports that the sum of full and part time employment is down by 48,000. 

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Meanwhile, the BLS also reports Jobs have increased by 1.9 million. 

A likely explanation for the divergences is boomer retirements coupled with approximately 2 million people taking extra part time jobs to make ends meet due to high inflation.

But no matter what the explanation, all the pieces point to a GDI that's not happening. 

It's amazing that people think this economy is doing well when it's obvious that it isn't. 

Last Five Quarters of Real Final Sales

  • 19,449
  • 19,453
  • 19,524
  • 19,469
  • 19,516

That's an entire year of stagnation. I believe a recession started in May as that's when retail sales and housing both cracked.

But the whole recession debate is now silly. 

Expect a Long Period of Weak Growth, Whether or Not It's Labeled Recession

On August 19, I commented Expect a Long Period of Weak Growth, Whether or Not It's Labeled Recession

On August 26, at Jackson Hole, Fed Chair Jerome Powell Pledges to "Act With Resolve" to Beat Inflation

Key comments: "Reducing inflation is likely to require a sustained period of below-trend growth."

We have already had a year of very weak Real Final Sales growth (assuming there was any growth at all). Expect more weakness. 

Meanwhile, please note The Fed is Openly Cheering the Stock Market Plunge Following Jackson Hole.

Good luck with that. 

Nasdaq 100, 2000 Top to 2002 Bottom

For discussion, please see If Unemployment Levels Remain Low, How Far Can the Stock Market Decline?

This post originated at MishTalk.Com

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