Yesterday the BEA released its Third Estimate for Second Quarter GDP.
The third (final) estimate bumped up the prior estimate from 1.1% to 1.4%. The BEA changed the name from final to third because GDP is subject to revisions years or even decades later.
Diving into the report we see “Real Gross Domestic Income ” GDI went from +0.2% to -0.2%. Is that significant? Let’s take a look.
Third Estimate of Second Quarter GDP
DI and GDP are two measures of the same thing. Over time they equal. Since the data sources are different, they frequently diverge for a while.
Business Insider has a nice article that explains the difference: FORGET GDP: Here’s the new way Wall Street is measuring the US economy.
Note: The following snips are from May 30, 2015. The generalities are correct, the assessments as to what are happening now are incorrect.
The basic difference between the two is that GDP measures what the economy produces — goods, services, technology, intellectual property — while GDI measures what the economy makes, tracking things like wages, profits, and taxes.
Why GDI?
There are actual, substantive reasons for economists and market participants to focus on GDI rather than the traditional GDP number. In theory, the two numbers should be the same, as both are designed to measure the aggregate growth of the economy. GDP measures what the economy produces, GDI measures what it takes in.
But because they use different data sources, these readings are subject to measurement error, though the BEA notes they tend to follow similar paths over time.
A main difference in their inputs is tax receipts, with GDI taking into account taxes on production and imports, as well as subsidies, net interest, and miscellaneous payments.
Since the financial crisis, first-quarter GDP has consistently lagged growth during the second, third, and fourth quarters. And the whole point of the government “seasonally adjusting” the data is to smooth out these variances and give markets and the public a more reliable, consistent picture of the country’s economic health. Given the repeated failures of the first quarter to be anything other than a disappointment, it seemed that something was off.
As currently tabulated, GDP was a big disappointment in the first quarter. As currently tabulated, GDI showed an economy that is still growing.
And with lingering issues around how the government adjusts its GDP data, Deutsche Bank’s LaVorgna argued in a note on Friday, “the drop-off in estimated Q1 GDP growth has not altered our view that the underlying fundamentals of the economy remain on firm footing.“
Real GDI
As noted above, the Business Insider article was written May 30, 2015. Suddenly, there’s silence. This is why …
Whereas real GDP was revised up 0.3 percentage points, real GDI was revised lower by 0.4 percentage points, to -0.2%.
A quick glance at the recession bars in the above chart shows what negative GDI numbers traditionally mean.
Real Private Gross Domestic Investment
Real private investment (not to be confused with income) is a measure of investment in the real economy, not under the influence of massive amounts of government spending. The numbers are not pretty.
Government Spending
Government spending adds to GDP, by definition. Here’s the example I frequently use: If the government paid people to spit at the moon, it would add to GDP.
Real gross private investment normally accounts for only 13-16% or so of GDP. Private investment is a very volatile portion of GDP.
Wikipedia comments …”Gross private domestic investment is the measure of physical investment used in computing GDP in the measurement of nations’ economic activity. It provides an indicator of the future productive capacity of the economy. It includes replacement purchases plus net additions to capital assets plus investments in inventories. From 2002-2011 it amounted to 14.9% of US GDP, and from 1945-2011 was 15.7% of GDP (BEA, USDC, 2013). Net investment is gross investment minus depreciation. Of the four categories of GDP (investment, consumption, net exports, and government spending on goods and services) it is by far the least stable.”
The charts speak for themselves.
Mike “Mish” Shedlock.
“The charts speak for themselves.”
They certainly do, as it has been over 7 years since the end of the last recession.
Some would argue that the recession/depression never ended. It was just papered over.
I would like to add that this cycle’s “expansion” peaked at the lowest levels of any in the past 60 years; therefore, the GDI’s early warning is very real.
“Since the financial crisis, first-quarter GDP has consistently lagged growth during the second, third, and fourth quarters.”
During the recession Congress enacted accelerated depreciation for small business (section 179) with a year end expiration date. Without fail, the following year Congress would extend it (retroactively). Finally, I think they made it permanent last year.
But year after year business no doubt pulled forward purchases into Q4 (at Q1’s expense) fearing end of deduction.
What for a recession declaration not long AFTER the election.
That would be “Watch for.”
Oh you sillyheads. Recessions are so 20th Century.
The means by which recessions get measured and identified are very 20th century.
The fact that economies recede is as old as the hills.
Questions:
What happens when a big recession hits and the Fed has no room to walk the interest rate backwards?
How does a nation respond to counter a recession when interest rates are already at the lowest levels?
Does this put the country into a heightened danger during an economic downturn? Could the recession evolve into a depression with an interest rate remedy taken off the table?
Question :
Where is Lakshman Acuthan when you really need a recession called?
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A former Federal Reserve economist has recently advocated negative interest rates.
” The U.S. Federal Reserve might need to cut interest rates to as low as negative 2 percent, far lower than levels other global central banks have tested, a former Fed economist said.
That’s what would likely be needed to engineer a recovery if the U.S. economy were to fall into a recession in the next couple of years, Marvin Goodfriend, who was an economist and policy advisor at the Federal Reserve’s Bank of Richmond from 1993-2005, told CNBC’s “Squawk Box” on Thursday. ”
http://www.cnbc.com/2016/08/31/why-the-fed-might-need-to-cut-rates-to-minus-2-percent-former-fed-economist.html
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Good God. What numbskull would keep his hard earned money in a bank at a 2% annual charge simply for the privilege of doing so?
Mr. Goodfriend’s scenario is preposterous.
We American’s aren’t the sharpest tools in the shed – but give us a little credit.
Where will you store your digital currency?
I suspect by the time we reach that point we’ll see another 1776 moment.
Only about 10% of US dollar funds are held in the form of notes and coins. Cash in the UK already accounts for less than 50% of transactions, and contactless payments are expanding in leaps and bounds. Before long cash will become almost obsolete and central banks will give it the final push and abolish it. Then we shall only have digital money, which can be subjected to negative interest rates because there is no escape route. So buy physical gold and silver whilst you can, and blockchain money such as bitcoin if you are confident in it.
It is noteworthy that GDI & PGDI both missed forecasts of recessions with similar frequency, but on entirely different occasions. Might a melding of the two be a more consequent indicator, Mish?? As The Inquirer says, “Curious minds want to know!”
Yes that helps – Will post some charts later – this weekend or Monday
With capacity utilization so low, why would there be much in the way of Gross private domestic investment ?
https://fred.stlouisfed.org/series/TCU
Not to long ago, everyone watched GNP — until all the manufacturing moved away. Then we were told to focus on GDP — and ignore all the money flowing out of the country.
Now we are told to focus on yet another “official” guess — still not particularly relevant. — everyone ignore the problems highlighted by GNP, GDP, and XZY and whatever.
We have a new distraction for you — this new smoke and mirrors has many of the same letters, but still doesn’t tell you anything useful.
When the central planners can’t fix the economy, they try to fix the statistics.
How many “strong recession warnings” have we got since the last recession ended in 2009? It started with warnings of a double dip recession in late 2009. Since then we have been on the “precipice of the next crash” in ’10, ’11, ’12, ’13, ’14, ’15, ’16. Now 2017 is the “for sure” year things will certainly fall apart, just like 2016 was the “for sure year” about 9 mos ago. When will the perma bear boys who cry wolf finally see the real wolf?
They will be right one day, and they’ll hope that everyone forgot all the occasions when they were wrong!
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