Thursday, March 29, 2012

Q4 GDP and GDI

by Bill McBride on 3/29/2012 07:19:00 PM

Early this morning the BEA released the third estimate of Q4 GDP. The BEA reported that Real gross domestic product "increased at an annual rate of 3.0 percent in the fourth quarter of 2011", the same as the previous estimate.

Also in the release, the BEA reported the real gross domestic income (GDI) increased at a 4.4% annualized rate in Q4.

There are really two measures of GDP: 1) real GDP, and 2) real Gross Domestic Income (GDI). A research paper in 2010 suggested 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.
During the worst period of the recession, GDI fell more than GDP as Nalewaik noted. In subsequent revisions, GDP was revised down showing the economy contracted more than originally reported - and closer to the original GDI reports.

The opposite has happened over the last two quarters - GDI is showing stronger growth than GDP - and this suggests that 2nd half 2011 GDP might be revised up with the next annual revision that will be released on July 27th (Revised Estimates will be provided for years 2009 through 2011).

David Wessell wrote about this at the WSJ Real Time Economics this morning GDI: An Alternate Measure Showing Stronger U.S. Growth
With its third revision of fourth-quarter GDP, issued Thursday, the agency also released its GDI estimates. Here’s what they show:

GDP Q4 up 3.0% GDI Q4 up 4.4%

GDP Q3 up 1.8% GDI Q3 up 2.6%

FULL YEAR 2011 GDP: up 1.7% FULL YEAR 2011 GDI: up 2.1%

As our colleague Jon Hilsenrath notes: “The clues in these numbers are especially important now because of the Okun’s Law conundrum: The economy doesn’t seem to be growing fast enough to account for the recent sharp declines in the unemployment rate. It might be the case that GDP numbers are understating growth.” (Read more about the disconnect between growth and labor-market improvement.)

Reacting to the latest numbers (on Twitter), economist Justin Wolfers of the University of Pennsylvania said: “GDI growth was fast enough to explain rapid jobs growth. Historically, GDP revises toward GDI.”
Of course this is all history and the focus will be on Q1.

Note: Personal income and outlays for February will be released tomorrow.

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