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Did We Shrink or Did We Grow? Confusion Reigns After GDP Revisions

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GDP Revised Up But GDI Says We’re Contracting

Did the economy grow or shrink in the first three months of the year?

The revised estimate of first-quarter economic performance from the Bureau of Economic Analysis (BEA) painted a confusing picture on Thursday. Gross Domestic Product (GDP), the most widely followed scorecard for the economy, was revised up to a 1.3 percent annual growth rate. Another measure of the economy, Gross Domestic Income (GDI), however, was reported as falling at a 2.3 percent annual rate.

Conceptually, these two measures are supposed to be equal. GDP measures the country’s economic activity by final expenditures plus changes in inventories. GDI measures the income generated by those expenditures. In practice, however, they frequently differ because they are constructed using different sources of information. Economists refer to the difference as the “statistical discrepancy.”

The discrepancy for the first quarter is unusually large. According to Harvard economist Jason Furman, it is the sixth largest difference since 2003.

One approach to resolving the difference is simply to average them together. This would produce a contraction of 0.5 percent in the first quarter. And, as Furman points out, the average of GDI and GDP has pointed to a contraction in four out of the last five quarters.

This would support the view that the economy has been in a recession for quite some time, a view that a large share of the public shares but is scoffed at by most economists. The reason 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 have added something like an average of 220,000 jobs each month this year, which would be highly unusual for an economy in recession. Consumption growth came in at a very strong 3.8 percent in the first quarter, also something that you would not expect to see in a shrinking economy.

Consumer Spending Even Stronger Than Thought

That personal consumption expenditure figure was revised up by a tenth of a point. The increased spending for the quarter was led by durable goods, where spending rose at a 16.4 percent seasonally adjusted annualized rate. This was driven by a huge leap in spending on motor vehicles and parts. After the supply-chain driven shortage of autos, there is still a lot of pent-up demand for cars and trucks.

A two-tenths upward revision to a gain of 2.5 percent in services spending also drove the overall upward revision in personal consumption spending and added two and a half points to GDP.

Much of this strength in consumer spending, however, was due to the unusual January surge. By most accounts, February and March were weaker months for the consumer. Personal consumption expenditures grew two percent in January and then just 0.1 percent in February, according to the BEA. In March, they did not grow at all.

The Chicago Fed National Activity Index Confirms Easter Surge

So, does that mean the economy is running out of steam? As we have been reporting, the doldrums of the end of winter appear to have been transitory. The Chicago Fed National Activity Index was released on Thursday, and it showed a pickup in economic growth in April. All four broad 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 production rose one percent after falling 0.8 percent in March. The employment-related indicators also turned positive after subtracting from the March results.

On the other side of the ledger, the contribution from the personal consumption and housing category was negative but less so than in March. The contribution of sales, orders, and inventories was also less negative than in the previous month. It’s likely that the biggest drag there was from inventories.


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