Here are some additional comments Jim’s post on GDP .
- Final sales (ie, excluding inventory build-up) are not the same as GDP.
- GDP and GDP follow different trajectories
- GDP follows a different path than other key indicators
- Economic activity appears to have a broad geographic basis
The first point is that GDP is higher than final sales of domestic products (GDP minus inventory accumulation), but has a different gradient in the second quarter – an increase rather than a decrease. Final sales to private domestic buyers, sometimes used to infer domestic demand, were flat.
figure 1: GDP (blue), final sales of domestic products (tan), and final sales to domestic private buyers (green), all in billions. Ch.2012$ SAAR, logarithmic scale. The NBER uses shades of grey to define the peak and trough dates of the recession. Source: BEA and NBER.
What is the actual level of economic activity, the “Y” in the macro model? GDP is measured from the expenditure side and GDI is measured from the income side, and the two should be equal. The gap was at record levels in Q1; in Q2, we don’t have GDI yet, but if real GDI is flat (as it is real personal income excluding current transfers), then we have the following picture:
figure 2: GDP (blue), GDO (red), and GDO (red square) assuming constant 2022Q2 actual GDI, all in billions. Ch.2012$ SAAR, logarithmic scale. The NBER uses shades of grey to define the peak and trough dates of the recession. Source: BEA, NBER and author’s calculations.
GDO then declined in the second quarter and was largely flat in the first quarter. (GDI and personal income track each other nicely.) Why does this matter?as Furman (2016) notes:
The results show that the equal weight average [GDP and GDI] Close to the best way to combine them, as the average of GDP and GDI is closer to the latest estimates of GDP growth and is a better predictor of future economic growth than GDP or GDI alone.
This observation supports the idea that in future revisions, reported GDP may be revised upwards.
Finally, recognizing that GDP will be revised multiple times as more data becomes available, what other indicators indicate what is happening in economic activity?
image 3: Nonfarm payrolls (dark blue), Bloomberg consensus as of July 29 (blue+), civilian employment (orange), industrial production (red), 2012 excluding transferred personal income (green), manufacturing and trade sales Ch.2012$ (black), consumption of Ch.2012$ (light blue), monthly GDP of Ch.2012$ (pink), official GDP (blue bars), all log normalized to 2021M11=0. Sources: BLS, Federal Reserve, BEA, via FRED, IHS Markit (nee Macroeconomic Advisers) (published July 1, 2022), NBER, and author’s calculations.
It is clear that many indicators continue to grow beyond the presumed peak in the fourth quarter of 2021, based on currently reported GDP figures. The two highest-weighted series—non-farm employment and personal income excluding current transfers—have the largest divergence from GDP, with the former being the most severe.
Other indices also point to a different path than GDP. This is the Philly Fed’s synchronized index compared to IHS Markit’s monthly GDP.
Figure 4: 2012 Monthly GDP USD (pink), Synchronized Index (blue-green), both normalized to 2021M11=0. Source: BLS, Federal Reserve, BEA, via FRED, IHS Markit (nee Macroeconomic Advisers) (published July 1, 2022), Philadelphia FedNBER, and the authors’ calculations.
Interestingly, geographically, with the exception of Alaska and Montana, economic activity, as measured by the coincident index, has been rising across the country over the past three months (i.e. Q2 2022).
resource: Philadelphia Fedaccessed 29 July 2022.
Baumeister et al. Weekly Economic Conditions Indicator (Data as of 6/25) Agree with Alaska’s slowdown, but disagree with Montana (Utah is in the doldrums according to WECI).
All in all, headlines aside, economic activity appears to have continued to pick up in the second quarter.
