On the third estimate of GDP, the BEA releases information on Gross Domestic Income (GDI) and Gross Private Domestic investment (GPDI).

GDP and GDI are both the same measure of the same thing, but leads and lags apply.

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.

Real GDPI Pecent Change From Previous Quarter

Real GDPI Percent Change From Year Ago

Negative GPDI is strongly associated with recessions. After dipping into negative territory recently, it is now at a weak year-over-year reading of +0.098%.

Real GDI Percent Change From Previous Quarter

Real GDI Percent Change From Previous Quarter

GDI is the sum of all income earned while producing goods and services within a nation’s borders. It differs from gross domestic product (GDP), which gauges economic activity based on expenditure.

Negative GDI is also strongly associated with recessions.

Investopedia provides this Explanation of GDI.

GDI is calculated as the total income payable in GDP income accounts. It can be calculated in two ways:

1. GDI = compensation of employees + gross operating surplus + gross mixed income + taxes – subsidies on production and imports

Compensation of employees encompasses the total compensation to employees for services rendered. Gross operating surplus, also known as profits, refers to the surpluses of incorporated businesses. Gross mixed income is the same as gross operating surplus, but for unincorporated businesses.

2. GDI = rental income + interest income + profits + wages + statistical adjustments

Statistical adjustments may include corporate income tax, dividends and undistributed profits.

Combining GDI and GPDI

Real GDI and Real GPDI are frequently not in sync. When one is negative, quite often the other one isn’t.

 

GDI, GPDI Quarter-Over-Quarter

The above chart is very difficult to read due to scale differences between the two series.

Nonetheless, its easy to see that a strong recession signal is present when both GDI and GPDI are negative. That currently is not the case now. Both are positive.

 

Theory

  1. Real gross private investment normally accounts for only 13-16% or so of GDP. Private investment is a very volatile, but important portion of GDP. In contrast, government spending including transfer payments is typically steady.
  2. If businesses investment is expanding, that’s a sign of confidence in the economy and portends future hiring.
  3. Rising real incomes means consumers have increasing purchasing power. When consumers have more money, they are highly likely to spend.
  4. The combination of falling real incomes with falling business investment says businesses aren’t spending, and consumers cannot spend more without going deeper in debt.

Observations

This indicator sometimes seems to lead and sometimes seem to lag. The lags are easy to understand. Data only comes out quarterly.

The combination does provide a nice spot check. If either real GDI or GPDI is positive, the economy is not likely to be in recession.

Mike “Mish” Shedlock