Here are some notes to complement Jim’s post on the GDP release.
- Final sales (ie, excluding inventory backlog) show a different picture of GDP.
- GDP and GDP follow different paths
- GDP follows a different path than other major indicators
- Economic activity appears to be based on a wide geographical scope
For the first point, GDP is higher than final sales of GDP (GDP minus inventory accumulation), but has a different regression in the second quarter – increasing, not decreasing. Final sales to domestic private buyers, sometimes used to infer internal domestic demand, were flat.
Figure 1: GDP (in blue), final sales of domestic product (in tan), and final sales to domestic private buyers (in green), all in billions. Ch.2012 $SAAR, on a logarithmic scale. The National Bureau of Economic Research has identified peak-to-trough recession dates shaded in grey. Source: BEA and NBER.
What is the actual level of economic activity “Y” in the macro models? GDP measures it on the spending side, and GDI measures it on the income side, and the two should be equal. The disparity in the first quarter was at record levels. In the second quarter, we don’t have GDI yet, but if real GDI is constant (like real personal income excluding current transfers), then we have the following picture:
Figure 2: GDP (blue), GDO (red), and GDO assuming real GDI constant in 2022Q2 (red box), are all in billions. Ch.2012 $SAAR, on a logarithmic scale. The National Bureau of Economic Research has identified peak-to-trough recession dates shaded in grey. Source: BEA, NBER, and author calculations.
Then GDO declines in the second quarter, while remaining essentially flat in Q1. (GDI and personal income follow each other fairly well.) Why is this important? As Furman (2016) points out:
It turns out that the average equal weight of [GDP and GDI] It approximates the best way to combine them, since average GDP and GDI closely track the most recent estimates of GDP growth and are a better indicator of future economic growth than GDP or GDI alone.
This observation supports the view that in future revisions, reported GDP is likely to be revised upwards.
Finally, while acknowledging that GDP will be revised several times as additional data comes in, what other indicators do you have to say is happening to economic activity?
Figure 3: Nonfarm payroll employment (dark blue), Bloomberg Consensus as of 7/29 (blue+), civilian employment (orange), industrial production (red), personal income excluding transfers at Ch.2012 in US dollars (green), sales Manufacturing and trade in $Ch.2012 (black), consumption in $Ch.2012 (light blue), monthly GDP in $Ch.2012 (pink), official GDP (blue bars), all regular logarithms to 2021M11 = 0. Source: BLS, Federal Reserve, BEA, via FRED, IHS Markit (nee Macroeconomic Advisers) (version 7/1/2022), NBER and author calculations.
It is clear that many indicators continued to grow after the assumed peak in the fourth quarter of 2021 which one can rely on based on the GDP data as currently announced. The two most likely series — employment in non-farm payrolls and personal income excluding current transfers — differed from GDP, the most profound in the former.
Other indicators also point to a different trajectory than GDP. This is a coincidence index of the Federal Reserve Bank of Philadelphia compared to IHS Markit’s monthly GDP.
Figure 4: 2012 quarter monthly GDP in US dollars (pink), concurrent index (teal), both normalized to 2021 million 11 = 0. Source: BLS, Federal Reserve, BEA, via FRED, IHS Markit (nee Macroeconomic Advisors) ( Issue 7/1/2022, Philadelphia Fed, NBER, and author accounts.
It is noteworthy that economic activity geographically as measured by the simultaneous index has increased over the past three months (so, 2022Q2) across the country, with the exception of Alaska and Montana.
source: Philadelphia Federal, Accessed 7/29/2022.
The Baumeister et al. Weekly economic conditions indicators (data up to 6/25) agree for a slowdown in Alaska, but not for Montana (Utah is in recession according to WECI).
Altogether, after reading beyond the headlines, it appears that economic activity continues to increase during the second quarter.