Last month, the Bureau of Economic Analysis updated its estimates of economic output this year. It grew 2% in the first quarter. It also shrank by 1.8%. In the second quarter it grew by 2.1%. But it only grew by 0.5%.
Still confused?
It turns out there are two ways to measure the greatest economic indicator of all. And they don’t always – or even usually – agree.
Gross domestic product is the most important indicator by which we measure the size and growth of the economy. This is the value of all final goods and services. You can calculate it by adding up all the expenses for these goods and services.
“Consumer spending plus investment plus government spending plus net exports,” said David Wasshausen, deputy director of national accounts at the Bureau of Economic Analysis. “This is the most well-known measure of GDP. It’s taught in Macro 101.”
What you spent on your morning cup of coffee, the cafeteria rent, Social Security payments, the corn Iowa exports to Canada – it all goes there.
Now, second opinions are a good idea for many things, including the size of the economy, and there is more than one way to measure them. Instead of adding up spending, another way to measure the economy is to add up all the money we make.
What we spend on coffee is what a barista earns in wages, the coffee shop owner makes profit, and the shop owner earns rent. When the size of an economy is calculated by adding up income, it is called gross domestic income.
So two sides of the same coin – GDI and GDP.
“Theoretically, these things should agree,” Wasshausen said.
In reality, they don’t. Since 1947, there have only been 11 quarters in which the spending figure and the income figure matched.
“This is because GDP and GDI are based on completely different data and independent sources of information,” said Wasshausen.
Here is an example. A company could spend $1 million on new products in the spring, and that spending would be reported fairly quickly. However, the company may not sell all of these products by Christmas, so you won’t get the sales figures until much later.
For this and many other data-related reasons, you end up with two measures of the U.S. economy that often don’t quite agree. But sometimes they don’t even match in the slightest. The largest so-called “statistical discrepancy” occurred in 1993, when GDI and GDP differed by 2.7% of GDP.
At the beginning of this year it was like this again: the two countries were behind by 1.9% of GDP, but more importantly, their growth rates were pointing in different directions.
“So on a year-over-year basis, GDP is 2.5% higher than a year ago, but GDI is 0.5% lower than a year ago,” said Stephen Brown, deputy chief economist for North America at Capital Economics.
According to the spending version, GDP, the economy was growing; According to the income version, GDI, the economy contracted.
“So there is a very big discrepancy,” Brown said.
And that’s exactly what makes some people nervous. Months or even years in the future, the BEA revises its estimates. The numbers change. And with hindsight, some economists say a more pessimistic GDI was probably more accurate.
“It is much more likely to revise GDP growth downwards to say the economy is doing worse than we currently expect than to say GDI is revised upwards,” Brown said.
This does not always happen and the BEA points out that the data underlying the GDP figure is more reliable. But if it’s true this time, that would mean our economy isn’t in quite as good shape as we think.
“A really great example of this is 2007,” Brown said. One version of GDP says the economy grew this year, the other says it shrank. “And then we know that we had the worst recession since the Great Depression.”
Brown sees signs of economic weakness in the current job market. “We’ve had a lot of downward revisions lately, and if you graph those corrections versus employment over the long term, it suggests a pretty high risk that employment will fall completely.”
He also sees it in tax revenues. “These have also weakened over the last three quarters in a row, which is much more consistent with the GDI data than the GDP data. If the economy is growing, tax revenues shouldn’t actually go down.”
On the other hand, there are also positive signs from the economy. Manufacturing surveys are improving, the health care sector is still recovering, Brown said. Consumers are still spending money. This is more in line with the more positive, spending-based GDP. And various attempts to combine GDP and BDI suggest that the situation is improving this year.
But still, you know, what is it? Has the economy contracted or grown in recent quarters?
“The truth,” Brown said, “is probably somewhere in the middle.”
Unfortunately, the middle is a pretty big place.
A lot is happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down what’s happening in the world and tell you how it impacts you in a fact-based, understandable way. In order to continue to make this possible, we rely on your financial support.
Your donation today supports the independent journalism you rely on. For as little as $5 a month, you can help sustain Marketplace so we can continue reporting on the things that matter to you.
Comments are closed.