Growth: More Than Meets The Eye

The U.S. economy may not be as weak as it looks. While real gross domestic product, the popular gauge of economic growth, is slumping, another measure of economic activity called gross domestic income (GDI) remains strong. It could be a sign that real GDP is understating growth.

The economy as measured by GDP, including expenditures on all goods and services and changes in inventories, expanded in the first quarter by 2.1% from the previous year. For all of 2006, GDP grew 3.3%. Meanwhile, real GDI, which includes wages and corporate profits, was up 3.9% in 2006. First-quarter figures won't come out until the end of May, but personal income data over the first three months of 2007 already show an acceleration in wages and salaries, which makes up about half of all GDI.

Two Views Of The Economy
In theory, GDP and GDI should be equal. These two tallies of economic activity are akin to double entry accounting where outlays and receipts balance out. In reality, deficiencies in data collection mean the numbers often diverge. For example, quarterly GDP figures are initially based on monthly survey data from the Census Bureau that may not provide a thorough measure of output, while Labor Dept. figures used for early estimates of wages do not include bonuses and stock options, says Carol Moylan, chief of the National Income & Wealth Div. at the Bureau of Economic Analysis.

It's possible that GDI is giving a better picture of economic growth. A more complete accounting of economic activity covering the past three years is due out in late July. That's when the BEA releases its annual revisions using Internal Revenue Service figures and more comprehensive annual Census Bureau data.

If real GDP growth is revised upward, that could help solve the puzzle as to why the labor market continues to look tight. Such an outcome would most likely keep the Federal Reserve focused on potential inflation pressures and help quell any remaining concern surrounding the health of the economy.

By James Mehring

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