Thursday, December 29, 2011

Accelerating, or decelerating? GDP, or GDI?

We have had evidence for quite some time that "GDP(I) growth is better than GDP(E) growth at tracking fluctuations in true output growth." GDP(I) is commonly called Gross Domestic Income, and GDP(E) is Gross Domestic Product. Conceptually, both GDP(I) and GDP(E) measure the exact same thing, using different methodologies. The main reason, I think, why GDP(E) gets all the attention is that it is released one month earlier than GDP(I). It's also possible that a lot of people still don't know why and how GDP(I) is useful.

In 2011:Q3 GDP(I) grew just 0.22%. Perhaps more importantly for the short-term outlook, the q/q growth rate of GDP(I) has been diminishing during 2011: 2.68% in Q1, 0.26% in Q2, 0.22% in Q3. Far from improving, the U.S. economy seems to have been slowing down.

The growth rate of GDP(E), on the other hand, has been increasing: 0.36% in Q1, 1.33% in Q2, 1.81% in Q3. I do not know of any theory of why the path of the two growth rates is diverging. Nonetheless, an implication of the research mentioned above, by economist Jeremy Nalewaik at the Federal Reserve, is that output growth is more likely to have decelerated than to have accelerated through 2011:Q3. The naive approach of averaging the two measures yields the conclusion that output growth accelerated from 0.8% to 1.01% between Q2 and Q3. Still, a growth rate of 1.01% is nothing to be too cheerful about.

How fast is the economy really growing? We may not know till March 2012 (for Q4 the estimate for GDP(I) will probably be released with a three-month lag, rather than the customary two-month lag).

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