GDPplus is a Philadelphia Fed method that blends, not averages GDP and GDI. They revised the indicator significantly lower on Thursday. It’s a very good predictor of recessions.
Is GDP or GDI a Better Measure?
The Philadelphia Fed prefers GDI over GDP but it prefers a blend (not an average) which it calls GDPplus even more. Note that GDPE = GDP and GDPI = GDI in the discussion below.
The GDPplus Working Paper is mostly geekish math, but there are some readable snips.
In the U.S., in particular, two often-divergent GDP estimates exist, a widely-used expenditure-side version, GDPE [GDP], and a much less widely-used income-side version, GDPI [GDI].
Nalewaik (2010) and Fixler and Nalewaik (2009) make clear that, at the very least, GDPI deserves serious attention and may even have properties in certain respects superior to those of GDPE. That is, if forced to choose between GDPE and GDPI , a surprisingly strong case exists for GDPI . But of course one is not forced to choose between GDPE and GDPI , and a GDP estimate based on both GDPE and GDPI may be superior to either one alone. In this paper we propose and implement a framework for obtaining such a blended estimate.
Recession Outlook
After revisions (and what isn’t revised?), there has not been an instance where GDPplus was negative two quarters in a row when the economy was not in recession.
This is very unlike GDP which often has two quarters of negative GDP without the economy being in recession.
The problem is revisions. The first release of GDI is noisy.
GDPplus Recession Track Record
That’s a very impressive track record, with no misses and no false positives as long as one waits for the second revision to GDI.
In late 2022, I was positive the economy was in recession but look what happened.
Positive Revision Shock!
The Philadelphia Fed revised GDPplus higher reversed string of negative GDPplus numbers.
As revised, there was not a second consecutive quarter of negative GDPplus.
Q:Why the revisions?
A: Don’t blame GDPplus or the Philadelphia Fed. GDPplus is subject to huge revisions when the BEA revises GDP and GDI.
It’s important to note that the highlighted area is 5 months. That’s not quite two quarters. I think that 5 months is the minimum time needed for confirmation of the indicator.
This is not a real-time indicator. There isn’t any.
Q1 GDP Revised Lower, Q4 GDI Significantly Lower
Yesterday, I commented More Soft Economic Data, Q1 GDP Revised Lower, Q4 GDI Significantly Lower
Significant Negative Revisions
- 2024 Q1 GDP went from 1.6 percent to 1.3 percent.
- Based on updated data from the Bureau of Labor Statistics Quarterly Census of Employment and Wages program, Wages and salaries are now estimated to have increased $58.5 billion in the fourth quarter, a downward revision of $73.0 billion.
- Real gross domestic income is now estimated to have increased 3.6 percent in the fourth quarter, a downward revision of 1.2 percentage points from the previously published estimate of 4.8 percent.
The BEA revised GDI for 2024 Q4 from 4.8 percent to 3.6 percent. This resulted in major revisions to GDPplus.
How the 2024 Q1 GDP Update Impacted GDPplus
- GDPplus for 2024 Q1 went from 2.6 to 2.1
- GDPplus for 2023 Q2 went from 3.5 to 2.7
- GDPplus for 2023 Q3 went from 2.3 to 2.1
Note that the Philadelphia Fed had a GDPplus estimate for 2024 Q1 before GDI for 2024 Q1 was even released.
No Recession Signal Yet
The BEA and Philadelphia Fed both significantly lowered their estimates, but I doubt GDPplus for Q1 goes negative from 2.1 percent or GDI negative from 1.5 percent.
However, I do expect more revisions, all negative.
Is the US in Recession Now? Two Prominent Competing Views
I discussed another recession indicator in my May 28 post Is the US in Recession Now? Two Prominent Competing Views
Please give that post a look if you haven’t. It’s very meaty with a detailed look at the McKelvey recession indicator.
I intend to do a follow-up post on McKelvey next week. As of right now, I do not think we are in recession yet, with emphasis on yet.
I have this comment from Lacy Hunt “Payroll jobs overshot the QCEW in Q3 and Q4 in 2024 and the BED in Q3. Given the weakness in many indicators in Q1/24, then for me it is very likely that payroll survey continued to overshoot in Q1/24. The pattern of downward revisions will continue. This happened in at critical turning points in the past including 2008.“
I discuss the BED data and negative job revisions in my link above.
I am confident the US will be in recession this year.
Label the recession murder by poison.
“No Recession Signal Yet”
Yet it feels like a recession. Silicon Valley job cuts, various stores going out of business. California government budget cuts. Concern about commercial real estate and more bank failures.
It’s barely gotten started. The Fed only has a hammer and everything looks like a nail. But I predict rate cuts will do nothing but provide more inflation. Paradoxically, a rate hike is what’s necessary to quell the inflation that is afire now.
This is missing the context. Have revisions become larger in general? Are some data series more prone to revision, and have revisions become larger in those?
A YOUNG PERSON’S GUIDE TO THE ECONOMY
In 1100 words or less……….
If we’re to make sense of economic trends, we need to start by recognizing that there are two economies, not one. These are the “real economy” of material products and services, and the parallel “financial economy” of money, transactions and credit.
The “real” economy is an energy system, in which energy is used to convert raw materials into products. What matters here isn’t just the amount of energy available to the system, but the material cost of putting energy to use.
The energy used to create, operate, maintain and replace the energy supply infrastructure is energy that can’t be used for any other economic purpose. If this Energy Cost of Energy rises, less energy remains to power the economy. Material prosperity is a function of the surplus energy that remains after ECoE has been deducted from total supply.
The “financial” economy uses money for the exchange of the output of the “real” economy. Money thus has value only as a “claim” on what the energy economy produces. We can create money at will, but energy can’t be lent into existence by the banking system, or conjured out of the ether by central bankers.
https://surplusenergyeconomics.wordpress.com/2024/05/31/280-not-what-youve-been-told/
Latterly, though, depletion – the effect of using lowest-cost resources first, and leaving costlier alternatives for later – has started driving ECoEs sharply back upwards.
With fossil fuels continuing to account for four-fifths of global energy supply, this has pushed the overall ECoE of the economy up from 2% in 1980 to more than 10% today. We’ve already witnessed a five-fold increase in the material cost of energy, and ECoEs are going to carry on rising.
As ECoEs have risen, growth in the output of the global economy has decelerated. We’ve tried to counter this, first with “credit adventurism” and, since the GFC of 2008-09, with “monetary adventurism” operated through QE, ZIRP and NIRP.
Both real GDI and GDP are running significantly below the GDP plus in Q1. How does the math work?
Replace the Philadelphia Fed with that Quoth The Raven podcaster guy, Chris Irons.
SPY rise was unstoppable. Can it rise even higher : yes. If SPY backs up to the July/Oct area, about 100pts down, or about 20% down, it will not cause recession. Several stopping actions like that might. If SPY will make a rd trip to Feb 2020 high, about 200 pts down, and breach it, about 45%/55% down, GDP plus will follow SPY and test 2020 low. There are no recessions without major injuries….
The people who can’t afford a car, a house or a family have already declared a recession. No need to wait for the government to make it official.
GDP plus (brown) : how about a-b-c down to a higher low. When recessions were close GDP plus (brown) was shallow. After a period of accumulation they were deeper. In 2020/2021 volatility maxed, from a deep deflation to high inflation. System control : the osc might decay, retard and become lifeless.
A prominent landlord is buying recycled multis, becoming the rental king in several counties. Vacancies turnover is rising, but the waiting list is long. Mid mgt will handle the expansions. More responsibilities ==> higher salaries, benefits and bonuses.
All GDP values are distorted by failure to properly adjust for hyper inflation. USA is in a depression for the past four years. Millennials and GenZ got woke educations. They are not up to the task of producing anything of value. Work doesn’t fit their hand. Activism, social justice, and reforming the world are their goals in life.
I worked in industry for 31 years. In many of those years my jobs entailed providing senior management with data. If I put out numbers 33% off (GDI of 3.6% first reported as 4.8%), one of two things would have haplened –
1. I would have lost my job, or
2. Senior management would have told me to stop reporting the data and go find a value added job to do.
Seems like everything that is published by the government is effectively wrong and as such useless. Yet investment folks hold their breath waiting for the data.
My guess, and that’s really all it is because I never aid much attention to revisions, is that the inaccuracies are mainly the result of deadline pressure. I wonder if the magnitude of revisions has changed over time, and if so, why.
This is very unlike GDP which often has two quarters of negative GDP without the economy being in recession. – I thought two negative quarters was the definition of a recession.
Me too. I am confused by this.
How can someone get hold of you for an interview?
shoot me an email
Mike Shedlock @ gmail.com
GDP has been contracting the last four years. USA is in an inflation depression.
If I recall correctly, Q1 GDP came in at 1.6%. No recession, just a slowdown. Inflation ain’t quelled, so the Fed will have no reason to cut rates anytime soon. If there was ever an environment in which voters will ignore that sham conviction of Trump as the economy visibly weakens, this is it.
This data is consistent with the cfnai-ma3 reading which is right at.the threshold of a recession.
Anything to give powell and co. an excuse to lower interest rates.