The Bad News in Today's Happy Growth Report
In its latest report on U.S. economic output, the Commerce Department revised up its estimate of growth in the third quarter from a ho-hum 2.0 percent to a healthy 2.7 percent. But if you dig a bit deeper, you'll find at least an equal-sized serving of bad news.
There's more than one way to measure economic output. The headline estimate of gross domestic product that you read so much about is the result of adding up all spending in the economy. Buried deep in the report is an alternative measure, known as gross domestic income, obtained by adding up all the income earned. In theory, measures of GDP and GDI should be identical, because every dollar spent by someone is a dollar earned by someone else. In practice, the two measures differ, because they are based on different source data.
When you have two largely independent measures of the same phenomenon, it's probably worth paying attention to both. You probably also want to pay more attention to the measure that has historically been more accurate. Compelling research by Federal Reserve economist Jeremy Nalewaik, published in a journal that I edit, has shown that, in fact, early estimates of GDI are a more accurate indicator of the state of the economy.
The latest GDI data tell a sobering story. In the three months through September, GDI grew at an annualized, inflation-adjusted rate of only 1.7 percent, compared with 2.7 percent for GDP. Historically, when we've seen divergences like this, it has been more common for the GDP estimate to be revised toward the GDI estimate. So future revisions are likely to show that GDP growth was a bit weaker than the current optimistic headlines suggest.
Perhaps more strikingly, GDI in the second quarter of 2012 shrank at an annualized, inflation-adjusted rate of 0.7 percent. Together with the disappointing third-quarter number, this suggests that over the past two quarters, real GDI has grown at an annualized rate of only 0.5 percent. By contrast, the headline GDP data have grown at an average rate of 2.0 percent over the same period. We don't know which is right, but there's good reason to fear that the pessimistic data are closer to the truth.
There's another interesting question lurking in these numbers: Did the US economy fall into a (brief) recession around the second quarter of 2012?
Consider a few facts. GDI fell by 0.7 percent in the second quarter. Jobs data suggest employment growth was weak or nonexistent. Aggregate weekly hours worked in the private sector fell or were flat in March, April and May. The unemployment rate edged up from 8.1 percent in April to 8.3 percent in July, and the previous downward trend in initial unemployment claims reversed abruptly in April, rising through May and June. Industrial production also stopped rising in February, and has basically flat-lined since.
My best guess is that when historians have the benefit of more complete data, they won't call this a recession. Such a brief dip, whose timing and cause remain unclear, is probably best described as a stutter. The better news is that more recent indicators firmly suggest that economic growth has returned.
Perhaps the real lesson here is just how murky our macroeconomic data are. A pessimist may stress that the U.S. flirted with another recession in mid-2012. An optimist would point to the fact that we're clearly growing today. It's possible that both are right.
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