Photographer: Luke Sharrett/Bloomberg

This Measure Reveals the U.S. Expansion Might Deserve More Credit Than it Gets

Nonfinancial business output gains outpacing GDP growth by wide margin

Appearances can deceive. The world's largest economy may have been in better shape in recent years than growth figures suggested, as the Federal Reserve's easy money policy worked for America's businesses.

Economist Joe Carson of AllianceBernstein LP makes the case by looking at a handy measure of business output based on income-related data, such as corporate profits and workers' earnings.

Growth in that gauge—non-financial corporate output—usually outpaces inflation-adjusted gross domestic product just slightly during economic expansions. But the gap over the past six years has been three times wider than the average spread of the past three expansions from 1983-1989, 1991-2000, and 2002-2007. Carson says the unusual gulf is a sign that headline GDP is failing to tell the full story.

It's also a sign that U.S. companies have been doing better than a cursory glance at growth figures would suggest.

"It highlights the fact that the business sector has done OK in the most recent expansion,'' said Carson, director of global economic research at AllianceBernstein in New York. "Most of the weakness was in the government component, which has basically no sensitivity to interest rates. So the narrative that the economy is underperforming and is not reacting to the monetary stimulus is false.''

While businesses were benefiting from the low interest rate environment in recent years and creating jobs, which in turn helped consumers, the government was holding back, Carson said.

So he argues that the Fed's continuing accommodative stance to try to drive economic growth higher isn't going to do much to address the real weakness, which is mainly outside the private sector. The central bank held rates unchanged at its July meeting.

"People are missing the point'' that how federal, state and local agencies behave is more linked to their budget constraints—and so the public sector's drag on growth misleads, making monetary policy look less successful than it actually was at spurring the economy.

Another topical reason for looking at the numbers is that the Commerce Department will issue GDP revisions going back to 2013, along with second-quarter results, on Friday. Carson is betting growth in the back years will move up a notch.

His optimism is also based on another measure called gross domestic income, which combines all forms of earnings in the economy. Carson points out that this gauge grew in the past three years by an  average 2.4 percent a year, outpacing the 2.1 percent gain in GDP. Theoretically, the GDI and GDP figures should match over time.  But don't count on that happening soon,  Carson said, because it can take years for the data to accurately capture all the innovation and new services in the U.S.

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