The Scary Number Hiding Behind Today’s GDP Party
The federal government today released two very different estimates of the U.S. economy’s growth rate in the second quarter. The one that got all the attention was the robust 3.7 percent annual rate of increase in gross domestic product. Not many people noticed that gross domestic income increased at an annual rate of just 0.6 percent.
That’s a big discrepancy for two numbers that should theoretically be the same, since they’re two ways of measuring the same thing: the size of the economy. If you believe the GDP number, you’re happy. If you believe the GDI number, you’re thinking the U.S. is skating close to a recession.
The Bureau of Economic Analysis always gives more prominence to the GDP number in its quarterly press release. But today, for the second time in a quarterly report, it released an average of GDP and GDI growth rates. That average came in at 2.1 percent after rounding—and in this case, that’s probably closer to the truth than either number alone.
There is no name for the new hybrid data series, which was described rather prosaically as “the average of real GDP and real GDI.” President Obama’s Council of Economic Advisers nicknamed it gross domestic output in a July issue brief. Here’s what it wrote:
GDP tracks all expenditures on final goods and services produced in the United States, whereas GDI tracks all income received by those who produced that output. Conceptually the two should be equal because every dollar spent on a good or service (in GDP) must flow as income to a household, a firm, or the government (and therefore must show up in GDI). However, the two numbers differ in practice because of measurement error.
Hmm. Which to believe? As the old joke goes: “A person with one clock always knows what time it is. A person with two is never quite sure.”
Michael Feroli, chief U.S. economist for JPMorgan Chase, says he still gives more weight to the GDP number, but the low GDI growth rate does affect his thinking. “There are surprisingly small discrepancies between the numbers,” he says, “considering that you’re measuring the entire economy in entirely different manners.”
“We don’t even track [GDI], to tell the truth,” says Michael Englund, chief economist for Action Economics. But he does pay attention to one of its biggest components: profits. Those are notoriously difficult for the government to estimate and may account for a big part of the discrepancy between the two measures.
(Corrects third paragraph to say that this was the second time, not the first, that the government reported the average of gross domestic product and gross domestic income.)
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