Canada & U.S. Recessions Arguably Far Deeper Than Advertised
Such is the conclusion of those who now recognize G.D.I., or Gross Domestic Income, as a better indicator of recessions than G.D.P., or Gross Domestic Product. G.D.P., which has been used for decades, and was until recently heralded as the most comprehensive view of a nation's relative economic health or weakness, may be falling out of favor, and for good reason.
In addition to yesterday's post citing an argument in The Wall Street Journal's Market Watch that Fourth Quarter 2008 GDP failed to comprehensively show how the final quarter of last year was literally the worst quarter for the U.S. economy since The Great Depression, more and more research coming in supports the notion that GDI may replace GDP in the near future, anyway.
Meanwhile...
Wall Street Journal:
If You Thought GDP Was Bad, Wait Til You See GDI
Both the Federal Reserve and National Bureau of Economic Research have highlighted some of the advantages of gross domestic income over gross domestic product as an economic gauge.
Let’s hope they’re wrong.
Although the Commerce Department reported Thursday that GDP tumbled 6.3%, at an annual rate, during the fourth quarter, GDI plunged at a rate closer to 7.5%. That’s the biggest GDI drop since 1980. Both are released by Commerce, though in the case of GDI it comes with a significant lag since statisticians include corporate profits in that data series (Thursday’s report was the third estimate of fourth-quarter GDP, only the first of GDI).
GDP is consumption driven: consumer spending, investment, government spending and the like. GDI is income based, meaning things like income and corporate profits. In theory, the two should line up - but not always. In the case of the fourth quarter, a severe slide in corporate profits was likely the root of the discrepancy. Employee compensation, the other main GDI component, held up much better.
GDI does appear to be a better signal of the start of recessions than GDP, Fed research has shown. GDI turned negative in the fourth quarter of 2007, as did GDP, but then stayed weaker through the first three quarters of 2008 than GDP did.
Even the National Bureau of Economic Research, the semi-official arbiter of recession, took notice. When it announced the recession, NBER noted that GDP and GDI are the “two most reliable comprehensive estimates of aggregate domestic production.” But in determining the starting date of December 2007, NBER said, “most notably, both payroll employment and the income-side estimate of domestic production were lower in 2008Q1 than in 2007Q4.”
If GDI turns out to be a better signal of a recession’s depth, too, then this one could have a ways to go.
Globe and Mail:
Tories' rosy forecast outdated, budget officer says
Canada's federal budget watchdog warned MPs yesterday that the worsening recession has rendered the Harper government's January economic forecasts obsolete, predicting Ottawa will slide $10-billion deeper into deficit over the next 24 months with near-record levels of red ink ahead.
It wasn't a message the governing Conservatives liked hearing, though - and parliamentary budget officer Kevin Page found himself facing testy questions from Tory MPs unhappy with his bleaker economic outlook.
The civil servant told a Commons finance committee meeting the recession will be "sharper than assumed" in the Jan. 27 budget - a presentation that led to tense moments when Tory MPs asked him why he didn't report any "positive stuff" and raised concerns about what they suggested were "alarmist statements."
One senior Tory MP even chided Mr. Page for his choice of words because he used the verb "plunge" in a recent report to describe a 15.3-per-cent drop in Canada's Gross Domestic Income for the last quarter of 2008.
"I am not sure if an economist needs to use that harsh a language - but that's your decision," Ted Menzies, parliamentary secretary to Finance Minister Jim Flaherty, told the parliamentary budget officer.
Mr. Page warned the situation has deteriorated so much since the Harper government's January budget that any stimulus or jobs created by the Conservative package have been swamped by the eroding economic outlook.
He predicted 385,000 jobs will be lost before July and that economic output, by some measures, will be in worse shape than in the 1980s or 1990s recessions...
Calculated Risk:
Q1 GDP will be Ugly
...Earlier today the BEA released the February Personal Income and Outlays report. This report suggests Personal Consumption Expenditures (PCE) will probably be slightly positive in Q1 (caveat: this is before the March releases and revisions).
Since PCE is almost 70% of GDP, does this mean GDP will be OK in Q1?
Nope.
I expect Q1 2009 GDP to be very negative, and possibly worse than in Q4 2008. Right now I'm looking at something like a 6% to 8% decline (annualized) in real GDP...
In addition to yesterday's post citing an argument in The Wall Street Journal's Market Watch that Fourth Quarter 2008 GDP failed to comprehensively show how the final quarter of last year was literally the worst quarter for the U.S. economy since The Great Depression, more and more research coming in supports the notion that GDI may replace GDP in the near future, anyway.
Meanwhile...
Wall Street Journal:
If You Thought GDP Was Bad, Wait Til You See GDI
Both the Federal Reserve and National Bureau of Economic Research have highlighted some of the advantages of gross domestic income over gross domestic product as an economic gauge.
Let’s hope they’re wrong.
Although the Commerce Department reported Thursday that GDP tumbled 6.3%, at an annual rate, during the fourth quarter, GDI plunged at a rate closer to 7.5%. That’s the biggest GDI drop since 1980. Both are released by Commerce, though in the case of GDI it comes with a significant lag since statisticians include corporate profits in that data series (Thursday’s report was the third estimate of fourth-quarter GDP, only the first of GDI).
GDP is consumption driven: consumer spending, investment, government spending and the like. GDI is income based, meaning things like income and corporate profits. In theory, the two should line up - but not always. In the case of the fourth quarter, a severe slide in corporate profits was likely the root of the discrepancy. Employee compensation, the other main GDI component, held up much better.
GDI does appear to be a better signal of the start of recessions than GDP, Fed research has shown. GDI turned negative in the fourth quarter of 2007, as did GDP, but then stayed weaker through the first three quarters of 2008 than GDP did.
Even the National Bureau of Economic Research, the semi-official arbiter of recession, took notice. When it announced the recession, NBER noted that GDP and GDI are the “two most reliable comprehensive estimates of aggregate domestic production.” But in determining the starting date of December 2007, NBER said, “most notably, both payroll employment and the income-side estimate of domestic production were lower in 2008Q1 than in 2007Q4.”
If GDI turns out to be a better signal of a recession’s depth, too, then this one could have a ways to go.
Globe and Mail:
Tories' rosy forecast outdated, budget officer says
Canada's federal budget watchdog warned MPs yesterday that the worsening recession has rendered the Harper government's January economic forecasts obsolete, predicting Ottawa will slide $10-billion deeper into deficit over the next 24 months with near-record levels of red ink ahead.
It wasn't a message the governing Conservatives liked hearing, though - and parliamentary budget officer Kevin Page found himself facing testy questions from Tory MPs unhappy with his bleaker economic outlook.
The civil servant told a Commons finance committee meeting the recession will be "sharper than assumed" in the Jan. 27 budget - a presentation that led to tense moments when Tory MPs asked him why he didn't report any "positive stuff" and raised concerns about what they suggested were "alarmist statements."
One senior Tory MP even chided Mr. Page for his choice of words because he used the verb "plunge" in a recent report to describe a 15.3-per-cent drop in Canada's Gross Domestic Income for the last quarter of 2008.
"I am not sure if an economist needs to use that harsh a language - but that's your decision," Ted Menzies, parliamentary secretary to Finance Minister Jim Flaherty, told the parliamentary budget officer.
Mr. Page warned the situation has deteriorated so much since the Harper government's January budget that any stimulus or jobs created by the Conservative package have been swamped by the eroding economic outlook.
He predicted 385,000 jobs will be lost before July and that economic output, by some measures, will be in worse shape than in the 1980s or 1990s recessions...
Calculated Risk:
Q1 GDP will be Ugly
...Earlier today the BEA released the February Personal Income and Outlays report. This report suggests Personal Consumption Expenditures (PCE) will probably be slightly positive in Q1 (caveat: this is before the March releases and revisions).
Since PCE is almost 70% of GDP, does this mean GDP will be OK in Q1?
Nope.
I expect Q1 2009 GDP to be very negative, and possibly worse than in Q4 2008. Right now I'm looking at something like a 6% to 8% decline (annualized) in real GDP...