An additional look at GDP output

Here are some additional observations Jim’s post on GDP release .

  • Final sales (i.e. excluding stockpiling) show a different picture than GDP.
  • Gross domestic product and GDP follow different trajectories
  • GDP is on a different path than other key indicators
  • Economic activity appears to have a broad geographical basis.

On the first item, GDP is higher than final sales of domestic product (GDP minus stockpiling), but has a different gradient in the second quarter – growth rather than decline. Final sales to private domestic buyers, which are sometimes used to infer domestic demand, have not changed.

Figure 1: GDP (blue), domestic product final sales (yellow) and domestic private consumer final sales (green), all in billion Ch.2012 SAAR$, on a logarithmic scale. Peak-to-trough dates as determined by the NBER are in grey. Source: BEA and NBER.

What is the actual level of economic activity, denoted by the letter “Y” in the macro models? GDP measures it from the expenditure side whereas GDI measures it from the income side and they must be equal. Disparity in the first quarter was at a record level; In the second quarter we don’t have GDI yet, but if real GDI was flat (like real personal income excluding current transfers), then we have the following picture:

Figure 2: GDP (blue), GDO (red) and GDO at constant real GNI in the second quarter of 2022 (red square), all in billion Ch.2012 SAAR$, on a logarithmic scale. Peak-to-trough dates as determined by the NBER are in grey. Source: BEA, NBER and author’s calculations.

GDO then declines in the second quarter, remaining virtually unchanged in the first quarter. (GDI and personal income follow each other pretty well.) Why is this important? As Furman (2016) notes:

It turns out that the equally weighted average [GDP and GDI] close to the optimal way to combine them, since the average of GDP and GNI more closely matches the most recent estimates of GDP growth and is a better predictor of future economic growth than either GDP or GNI alone.

This observation supports the notion that future revisions of the reported GDP are likely to be revised upwards.

Finally, given that GDP will be revised many times as more data becomes available, what do other indicators say is happening to economic activity?

Figure 3: Non-farm employment (dark blue), July 29 Bloomberg consensus (blue+), civil sector employment (orange), industrial production (red), personal income excluding transfers in 2012, $ (green), sales in manufacturing and trade in Ch.2012$ (black), consumption in Ch.2012$ (light blue) and monthly GDP in Ch.2012$ (pink), official GDP (blue bars), all logs normalized to 2021M11= 0. Source: BLS, Federal Reserve, BEA, via FRED, IHS Markit (née Macroeconomic Advisors) (issue 07/01/2022), NBER and author’s calculations.

It is clear that many indicators continue to rise after the expected peak of the fourth quarter of 2021, which could be obtained from the GDP data as currently reported. The two most weighted series—non-agricultural employment and personal income excluding current transfers—deviated from GDP, with the first being the most significant.

Other indices also point to a different trajectory than GDP. Here’s the Philadelphia Fed’s matched index compared to IHS Markit’s monthly GDP.

Figure 4: Monthly GDP in Ch.2012$ (pink), coinciding index (turquoise), both logs normalized to 2021M11=0. Source: BLS, Federal Reserve, BEA, via FRED, IHS Markit (excluding macro advisors) (7/1/2022 edition), Philadelphia FedNBER and author’s calculations.

It is interesting to note that geographically, economic activity as measured by the coincident index has been growing over the last three months (i.e. Q2 2022) nationwide except for Alaska and Montana.

Source: Philadelphia Fedas of 07/29/2022.

Baumeister and others. Weekly Indicators of Economic Conditions (data as of June 25) agrees with a slowdown in Alaska, but not in Montana (Utah is in decline, according to WECI).

Overall, despite the headlines, economic activity appears to have continued to pick up in the second quarter.