By
Derek Hamilton
July 11, 2023
When economists measure economic growth, they typically look at changes in gross domestic product (GDP). While US GDP growth has generally decelerated over the past year, it remains clearly positive. However, many investors do not realize that there are two different measurements of economic activity: GDP, which measures economic activity surrounding goods and services, and gross domestic income (GDI), which measures income across the economy, such as wages and corporate profits. People have tended to focus on GDP because it is released sooner than GDI. Theoretically, the two measures should match, as income growth drives the production and consumption of goods and services, but they can diverge at times. In fact, the two measures are currently giving different signals.
The most recent data in the US shows that GDP grew by 1.8% in the first quarter of 2023 on a year-over-year basis, while GDI fell by 0.8%, its second consecutive decline. As you can see from the chart below, the economy has always either been in a recession or entered one shortly after GDI fell on a year-over-year basis. Furthermore, we think it is interesting to note that prior to the 1990-1991 and 2007-2009 recessions, GDI moved lower ahead of GDP. There is debate in the academic world about which measure offers a more accurate picture of the economy. While the purpose of this commentary is not to argue which measure is better, we felt it is prudent to highlight the current discrepancy and the historical precedent of declining GDI. This is yet another datapoint that supports our near-term recession call.
US Real GDP vs. Real GDI
1948-2023; quarterly data points
Note : Shaded area on chart indicates a period of recession
Chart is for illustrative purposes only.
Sources: Macquarie and Macrobond.
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