Economics
Has the recession finally ended?
A FEW weeks ago, I noted that one explanation for weaker than expected employment performance might be that the GDP measure of output is simply not the best indicator of economic activity;
GDP"”the total market value of output produced each year"”is the most commonly used indicator of the "true" state of an economy. A theoretically equivalent but less commonly-cited indicator is Gross Domestic Income, which adds up wages, profits and taxes. In practice, the two numbers often move slightly out of step with each other, and a growing body of research hints that GDI, rather than GDP, should be given more weight in computing an estimate of the economy's true direction.
By the light of GDI, the American economy looks a bit more pallid. According to the income measure, activity slowed at a 7.3% annual rate in the fourth quarter of 2008. GDP, meanwhile, recorded a 5.4% drop. And in the third quarter of 2009 (the most recent for which income data are available), GDI continued to contract while GDP notched up the increase that led many economists to announce the end of the recession.
This was based in part on research put together by Fed economist Jeremy Nalewaik, who has investigated this topic over the course of several years. Mr Nalewaik recently presented a new paper on GDI as one of the Brookings Papers on Economic Activity. He writes:
Considerable evidence suggests that the growth rates of [GDI] better represent the business cycle fluctuations in "true" output growth than do the growth rates of GDP...For the initial growth rates, the revisions evidence over the past 15 years, the correlations with other business cycle indicators, and the recent behavior of the estimates around cyclical turning points all point to this conclusion. For the latest estimates that have passed through their cycle of revisions, careful consideration of the nature of the source data, statistical analysis of the information added by the revisions, and statistical tests as well as informal comparisons with other businesss cycle indicators, again all suggest [GDI] growth is better than GDP...growth.
And:
These two measures have shown markedly different business cycle fluctuations over the past twenty-five years, with GDI showing a more-pronounced cycle than GDP...GDI currently shows the 2007-2009 downturn was considerably worse than is reflected in GDP.
One of the concluding thoughts in Mr Nalewaik's paper concerns the delay with which GDI data is published. The advance estimate of fourth quarter GDP was made available in late January. Meanwhile, the first report on fourth quarter GDI has only just come out, two months later. As it happens, GDI finally showed expansion during the last three months of the year:
A bit hard to see, but what you're looking at there is GDP (the blue line) and GDI (the red line) from the beginning of 2007 through the end of 2009. Obviously, GDI performance has been worse than GDP performance, and in the third quarter the latter rose while the former did not. But while the gap between the two remains large, the income measure of output actually rose faster during the fourth quarter than did the expenditure measure. So perhaps we can say with a little more confidence that the recession had, as of late 2009, finally ended.
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Hooray, it's over! Can you spare a dollar mister, so I can buy a drink to celebrate?
I'm curious what is missing from GDP in GDI. Is it investment, mainly?
Wecome to the world of Austrian econ! Austrians and Austrian sympathizers badgered the Feds until the came up with GDI. For what is wrong with gdp, check out Pepperdine University econ prof Dr. George Reisman's book "Capitalism" available online on his web site. GDP is not "gross" anything; it is the net domestic product after all costs of inputs are subtracted. Essentially, gdp leaves out capital goods, where most of the depression takes place.
All that will matter in November is unemployment.
In this blog, our correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts.
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