Friday, May 27, 2011

Real GDI and Personal Income less Transfer Payments still below pre-recession levels

by Bill McBride on 5/27/2011 01:17:00 PM

There are really two measures of GDP: 1) real GDP, and 2) real Gross Domestic Income (GDI). The BEA also released Q1 GDI yesterday as part of the second estimate for Q1 GDP. Recent research suggests that GDI is often more accurate than GDP.

For a discussion on GDI, see from Fed economist Jeremy Nalewaik, “Income and Product Side Estimates of US Output Growth,” Brookings Papers on Economic Activity. An excerpt:

The U.S. produces two conceptually identical official measures of its economic output, currently called Gross Domestic Product (GDP) and Gross Domestic Income (GDI). These two measures have shown markedly different business cycle fluctuations over the past twenty five years, with GDI showing a more-pronounced cycle than GDP. These differences have become particularly glaring over the latest cyclical downturn, which appears considerably worse along several dimensions when looking at GDI. ...

In discussing the information content of these two sets of estimates, the confusion often starts with the nomenclature. GDP can mean either the true output variable of interest, or an estimate of that output variable based on the expenditure approach. Since these are two very different things, using “GDP” for both is confusing. Furthermore, since GDI has a different name than GDP, it may not be initially clear that GDI measures the same concept as GDP, using the equally valid income approach.
The following graph is constructed as a percent of the previous peak in both GDP and GDI. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%.

GDP and GDI as percent of previous peakClick on graph for larger image in graph gallery.

It appears that GDP bottomed in Q2 2009 and GDI in Q3 2009. Real GDP finally reached the pre-recession peak in Q4 2010, but real GDI is still slightly below the previous peak.

Using GDI, the economy will be back to the pre-recession peak in Q2 2011.1

However, by other measures - like real personal less transfer payments and employment - the economy is still far below the pre-recession peak.

Personal Income less TransferThe second graph is based on the April Personal and Outlays report this morning, and shows that real personal income less transfer payments is still 3.4% below the previous peak.

And of course there are still 6.955 million fewer payroll jobs than at the beginning of the 2007 recession.

Finally, recoveries following the bursting of a credit bubble - with a financial crisis - are always sluggish. So this isn't surprising, but it is still very painful.

1 Last year I disagreed with St Louis Fed President James Bullard - and I argued that real GDI would probably be back to pre-recession levels in Q1 2011 (close, but it now looks like Q2).

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