GDP Doesn’t do This Slump Justice

We’re all relatively familiar with Gross Domestic Product, or GDP, which measures the aggregate expenditure, or output of the economy. However, we tend to hear much less about its unloved cousin, Gross Domestic Income, or GDI, which tracks the economy’s total income.

A Federal Reserve economist, Jeremy Nalewaik, recently decided to look at the US downturn from a GDI perspective — which he determined to be more accurate — and the findings were much more negative than GDP indicates.

According to The Wall Street Journal:

“In theory, the two measures should equal one another, in practice they don’t quite, and Mr. Nalewaik argues that GDI is the better of the two…

“…He notes that GDI fell far more sharply in the teeth of the recession, dropping at a 7.3% annual rate in the fourth quarter of 2008, and 7.7% in the first quarter of 2009. GDP, in comparison, fell by 5.4% and 6.4%. Moreover, while GDP showed the economy began to grow in last year’s third quarter, GDI showed it continued to contract…

“‘[T]he latest downturn was likely substantially worse than the current GDP… estimates show,’ he writes. ‘Output likely decelerated sooner, fell at a faster pace at the height of the downturn, and recovered less quickly than is reflected in GDP… and in conventional wisdom.’”

The article argues that GDI is a better measure because revisions of GDP tend to bring it closer to GDI, and because GDI correlates more strongly with other economic indicators. Perhaps most importantly, as Nalewaik states, if GDI looks worse than GDP… well, then it is at least more consistent with “conventional wisdom.”

Read more about the GDI in The Wall Street Journal’s coverage of how GDP understates the depth of the recession.

Best,

Rocky Vega,
The Daily Reckoning