Have we shrunk or have we grown? Confusion reigns after GDP revisions
GDP revised up but GDI says we are contracting
Did the economy grow or shrink in the first three months of the year?
The revised estimate of the first quarter economic performance of the Economic Analysis Office (BEA) painted a confusing picture on Thursday. Gross domestic product (GDP), the most widely followed scorecard for the economy, was revised up to an annual growth rate of 1.3%. Another measure of the economy, Gross domestic income (GDI), however, was reported to fall at an annual rate of 2.3 percent.
Conceptually, these two measurements are meant to be equal. GDP measures the country’s economic activity by final expenditure plus inventory changes. The RIB measures the income generated by these expenses. In practice, however, they often differ because they are constructed from different sources of information. Economists refer to this difference asstatistical discrepancy.”
The gap for the first quarter is exceptionally large. According to Harvard economist Jason Furman, it is the sixth biggest difference since 2003.
The amount of error in economic data is exceptionally high.
In the first quarter, GDP was +1.3% and GDI -2.3%, a difference of 3.6 pp. This is the 6th largest absolute difference since 2003, a deviation from the 96th percentile.
(This uses early GDI estimates and the comparable vintage of GDP.) pic.twitter.com/lExIxAXAh3
—Jason Furman (@jasonfurman) May 25, 2023
One approach to solving the difference is to simply average them together. This would produce a contraction of 0.5% in the first quarter. And, as Furman points out, the average of GDI and GDP has indicated contraction in four of the past five quarters.
New data indicates that the economy contracted at an annual rate of -0.5% in the first quarter, the fourth quarter of the last five with negative growth.
This is based on the average of GDP (+1.3% in Q1) and GDI (-2.3%) which is generally more reliable than either individually.
—Jason Furman (@jasonfurman) May 25, 2023
This would support the view that the economy has been in a recession for some time, a view that much of the public shares, but which is scoffed at by most economists. The reason why the idea that we are in a recession seems so implausible is that consumer spending remains very strong and the labor market incredibly tight. We’ve added something like an average of 220,000 jobs each month this year, which would be very unusual for an economy in recession. Consumption growth hit a very strong 3.8% in the first quarter, which you wouldn’t expect to see in a declining economy.
Consumer spending even stronger than expected
This figure for personal consumption expenditure has been revised upwards by a tenth of a point. The increase in spending for the quarter was led by durable goods, where spending grew at a seasonally adjusted annualized rate of 16.4%. It was led by a huge jump in spending on motor vehicles and spare parts. After the shortage of automobiles caused by the supply chain, there is still a lot of pent-up demand for cars and trucks.
An upward revision of two ticks for a gain of 2.5% in service expenses was also behind the overall upward revision in personal consumption expenditure and added two and a half percentage points to GDP.
However, much of this strength in consumer spending is attributable to the unusual surge in january. By most accounts, February and March were weaker months for the consumer. Personal consumption expenditure rose 2% in January, then only 0.1% in February, according to the BEA. In March, they did not grow at all.
Chicago Fed National Activity Index Confirms Easter Rise
So, does this mean the economy is running out of steam? As noted, the late winter slump appears to have been short-lived. THE Chicago Fed National Activity Index was released on Thursday, and it showed a pick-up in economic growth in April. All four major categories of economic activity improved in April, although two remained negative.
Production-related indicators contributed +0.15 to the index in April after being a drag in March. Manufacturing output rose 1% after falling 0.8% in March. Employment-related indicators also turned positive after subtracting the March results.
On the other side of the ledger, the contribution from the personal consumption and housing category was negative but less than in March. The contribution from sales, orders and inventories was also less negative than the previous month. Probably the biggest drag there came from inventories.
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