With today's release of revised data showing that GDP grew faster than originally estimated in the third quarter of this year, Brian Blackstone of the WSJ Economics Blog reminds us that we can measure aggregate activity as GDP and as GDI (because income = expenditures), and notes the two measures are not telling the same story:
Gross Domestic Income Tells Different Story Than GDP, WSJ Economics Blog: According to the latest gross domestic product revision, the U.S. economy swelled at nearly a 5% clip last quarter, almost double the economy’s noninflationary limit. Or did it?
Gross domestic income – a lesser-known gauge that the Fed has highlighted in the past as perhaps a better alternative — increased less than 2% last quarter, well below the economy’s potential. The first estimate of GDI is released with the second GDP estimate because it incorporates data that isn’t available earlier.
GDP counts economic activity based on expenditures, while GDI bases it on income. In theory, they should add up the same, though the often diverge — albeit not as much as they did last quarter.
Earlier this year when the Fed was trying to reconcile slower GDP growth with still-strong labor markets, it noted that GDI “might better capture the pace of activity.” GDI was running hotter than GDP at the time. ...
The main difference between the two gauges last quarter was corporate profits, which GDI includes and GDP excludes. Corporate profits from current production fell last quarter. GDI also doesn’t explicitly include net exports and inventories, as GDP does. GDI, in contrast, relies more heavily on employee compensation data.
But when there are differences, Fed officials may lean towards GDI, especially when it comes to signaling economic downturns. Fed economist Jeremy Nalewaik wrote in a March paper that GDI “has done a substantially better job recognizing the start of the last several recessions than has real-time GDP.” ...