Monday, August 31, 2015

Is US Gross Domestic Income 'Scary?'

Let’s face it: Bad news sells. Doomsday scenarios often capture widespread popular attention particularly well. We live in an age of insatiable demand for content from the financial press. I’ve noticed that many of their websites have adopted a very breezy style that increasingly features headlines aimed at grabbing attention by arousing fear, so that the reader will be motivated to read the often-much-less-alarming story. Even BloombergBusiness seems to be adopting this approach, which I believe was pioneered by Henry Blodget’s Business Insider website. A case in point is an 8/27 BloombergBusiness article titled "The Scary Number Hiding Behind Today’s GDP Party." Here are the first two paragraphs:

“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.” A closer inspection presents a much less worrisome view:

(1) Small tracking error. The quarterly GDP and GDI numbers tend to be volatile and prone to significant revisions. Indeed, Q2’s growth rate for real GDP was revised up from the preliminary 2.3% (saar) to 3.7%. The growth trends in both real GDP and GDI are more stable on a y/y basis. The former was up 2.7% y/y during Q2, while the latter was up 2.2%. That’s not much of a difference and is consistent with the tracking error that the two have had for years. Since 2010, both of these growth rates have been around 2.5%. Since the recovery began in Q3-2009, real GDI is actually up slightly more than real GDP, i.e., 15.3% vs. 13.7%.

(2) Statistical discrepancy. In current dollars, the quarterly difference between the GDP production and the GDI income measures of overall economic activity has been very small, rarely exceeding +/-2.0% of GDP. This statistical discrepancy tended to be mostly positive from the late 1940s through the mid-1990s, and mostly negative since then.

(3) The big driver. Labor compensation has the biggest share of National Income (i.e., GDI plus net income receipts from the rest of the world less depreciation), accounting for 61.9% of it during Q2. It includes wages, salaries, and supplements. On a y/y basis, inflation-adjusted compensation rose 3.8% y/y during Q2, with real wages and salaries up 4.0%. These are solid growth rates in real income earned by workers, which is the main driver of consumer spending and the overall economy.

Today's Morning Briefing: Alphabet Soup. (1) GDP, GDI, EIP, ETFs, HFTs, & UFOs. (2) Pure air and water. (3) Iceland, Ice Age, and the Ice Man. (4) The financial press is going Blodget. (5) BloombergBusiness finds a scary number. (6) A small statistical discrepancy. (7) Consumer incomes and spending growing robustly. (8) The role of ETFs and HFTs in last week’s market mayhem. (More for subscribers.)

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