Newsflash:
US Recession May Not Have Ended Last Summer,
And Considerably Deeper & Longer Than Stated
Shocker, right?
Well, here's some night owl blogging - are there any night owl or predawn commenters? Especially considering that in just about 51 minutes I'm giving up a full hour to the time police, I might as well try to make this a worthwhile post, eh? ;)
At the start of the Great Recession I began occasionally blogging about Gross Domestic Income, or GDI. GDI is the income-side perspective of Gross Domestic Product, and in many recessions in general, and with the Great Recession in particular, it has been a far more compelling tell than it's better-known sibling, Gross Domestic Product, or GDP.
The following report is courtesy The Federal Reserve Bank of Atlanta's MacroBlog. Even a quick glance at GDI's performance over the third quarter of 2009 further brings into question that NBER will date the end of the recent recession to last summer, given that they are already on record as rightfully giving GDI a little extra attention for the most recent recession.
Macroblog:
A look at the income-side estimates of growth
Last week, a post in the New York Times' Freakonomics blog on Okun's law made note of the statistical discrepancy between the two methods for calculating national output:
"…there are two measures of output growth-the usual measure, which adds up total spending in the economy, and the alternative, which adds up total income. In theory, the two should be exactly the same. In practice, they have been very different during this recession… These GDI [gross domestic income] numbers suggest that output growth actually declined much more sharply than had been widely understood."
Indeed, the recession looks deeper and the recovery seems much less pronounced, looking at the income-side data in this chart.
(enlarge)
There has been a good deal of coverage about the discrepancy between the income and expenditure sides of gross domestic product (GDP) calculations in the past couple of years. Jeremy Nalewaik, at the Federal Reserve Board, is often cited for his work arguing that GDI may be a more reliable measure for delineating recessions than GDP (see 1, 2, 3). In fall 2008, Jim Hamielton noted the relatively weak behavior of GDI toward the beginning of the current recession: "It is interesting that while GDP indicates sluggish growth over the last three quarters, GDI looks much more like a recession, with 2007:Q4-2008:Q1 satisfying the traditional rule of thumb of two quarters of falling real output."
But apart from recession dating, how seriously should we take these income-side numbers?
One issue with using GDI data is that they lag the GDP data by a full quarter. That stated, a 2006 study by Fixler and Grimm at the Bureau of Economic Analysis (BEA) argues that GDI data contains valuable information.
"There is evidence that income-side measures contain information about revisions to estimates of GDP. National income is statistically significant in explaining revisions from the final current quarterly to the latest estimates of GDP. Conversely, there is no evidence that product-side measures contain information about revisions to GDI and national income."
In other words, history suggests that when these two measures of national output disagree, GDP tends to get revised in the direction of GDI and not the other way around. So, if this relationship holds, it would be prudent not to dismiss the latest divergence in the two measures because it suggests that the decline in national output has been more protracted, and the recovery (through the third quarter 2009) more modest, than what is being reflected in GDP...
-Related-
NYT Freakonomics Blog
Is Okun's Law Really Broken?
“Okun’s law” is a much-loved rule of thumb - it links increases in the unemployment rate with decreases in output. The red dots in the chart below illustrate Brad DeLong’s version of this rule, which relates the change in output over the past eight quarters with the change in the unemployment rate. Most of these dots lie pretty close to the dashed line, which suggests a stable relationship. Based on this rule, and the relatively mild decline in measured output, you might have expected the unemployment rate to have risen by 3.5 percentage points over the past two years, to about 8 percent. But the dots at the top left show what actually happened-unemployment rose by something closer to 5.5 percentage points, and the unemployment rate is closer to 10 percent. That’s a big difference. And it has led many commentators to ask whether Okun’s Law is broken.
But perhaps the problem isn’t Okun’s Law. Perhaps the problem is how we measure output growth. In fact, there are two measures of output growth-the usual measure, which adds up total spending in the economy, and the alternative, which adds up total income. In theory, the two should be exactly the same. In practice, they have been very different during this recession. The blue dots show recent changes in this alternative measure of output. These GDI numbers suggest that output growth actually declined much more sharply than had been widely understood. Based on this alternative measure, the recent sharp rise in unemployment is no mystery at all...
What’s good news for Okun’s law, though, is bad news for the economy. This alternative measure of output growth suggests that the recession may have been deeper, and longer-lasting than previously thought, although data for the fourth quarter aren’t yet available. While many economists believe the recession ended in the second quarter of 2009, this income-based measure of output kept shrinking in the third quarter, too...
-Related-
The Economist
Unemployment figures: Slow going
Why is the recovery jobless? Maybe because it isn't a recovery
IN FEBRUARY, for the twenty-fifth time in 26 months, the American economy shed jobs. The toll-a decline of 36,000-was smaller than feared for a month of severe winter weather. But it was distressing nonetheless; another bit of evidence pointing towards a jobless recovery. Most economists estimate that the recession in America ended around the close of the second quarter of 2009, the last quarter in which GDP shrank. But during the second half of last year the economy still managed to lose more than a million jobs...
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.
The picture painted by GDI throughout the downturn is one of an economy substantially weaker than indicated by GDP: one more in line with the employment data and with the experience of most Americans. But whether productivity or unexpectedly weak growth is to blame for high unemployment, there is a danger that policymakers have failed to recognise the full extent of the slack in the economy. The result may be a disappointingly slow, fragile and jobless exit from recession.
And Considerably Deeper & Longer Than Stated
Shocker, right?
Well, here's some night owl blogging - are there any night owl or predawn commenters? Especially considering that in just about 51 minutes I'm giving up a full hour to the time police, I might as well try to make this a worthwhile post, eh? ;)
At the start of the Great Recession I began occasionally blogging about Gross Domestic Income, or GDI. GDI is the income-side perspective of Gross Domestic Product, and in many recessions in general, and with the Great Recession in particular, it has been a far more compelling tell than it's better-known sibling, Gross Domestic Product, or GDP.
The following report is courtesy The Federal Reserve Bank of Atlanta's MacroBlog. Even a quick glance at GDI's performance over the third quarter of 2009 further brings into question that NBER will date the end of the recent recession to last summer, given that they are already on record as rightfully giving GDI a little extra attention for the most recent recession.
Macroblog:
A look at the income-side estimates of growth
Last week, a post in the New York Times' Freakonomics blog on Okun's law made note of the statistical discrepancy between the two methods for calculating national output:
"…there are two measures of output growth-the usual measure, which adds up total spending in the economy, and the alternative, which adds up total income. In theory, the two should be exactly the same. In practice, they have been very different during this recession… These GDI [gross domestic income] numbers suggest that output growth actually declined much more sharply than had been widely understood."
Indeed, the recession looks deeper and the recovery seems much less pronounced, looking at the income-side data in this chart.
(enlarge)
There has been a good deal of coverage about the discrepancy between the income and expenditure sides of gross domestic product (GDP) calculations in the past couple of years. Jeremy Nalewaik, at the Federal Reserve Board, is often cited for his work arguing that GDI may be a more reliable measure for delineating recessions than GDP (see 1, 2, 3). In fall 2008, Jim Hamielton noted the relatively weak behavior of GDI toward the beginning of the current recession: "It is interesting that while GDP indicates sluggish growth over the last three quarters, GDI looks much more like a recession, with 2007:Q4-2008:Q1 satisfying the traditional rule of thumb of two quarters of falling real output."
But apart from recession dating, how seriously should we take these income-side numbers?
One issue with using GDI data is that they lag the GDP data by a full quarter. That stated, a 2006 study by Fixler and Grimm at the Bureau of Economic Analysis (BEA) argues that GDI data contains valuable information.
"There is evidence that income-side measures contain information about revisions to estimates of GDP. National income is statistically significant in explaining revisions from the final current quarterly to the latest estimates of GDP. Conversely, there is no evidence that product-side measures contain information about revisions to GDI and national income."
In other words, history suggests that when these two measures of national output disagree, GDP tends to get revised in the direction of GDI and not the other way around. So, if this relationship holds, it would be prudent not to dismiss the latest divergence in the two measures because it suggests that the decline in national output has been more protracted, and the recovery (through the third quarter 2009) more modest, than what is being reflected in GDP...
-Related-
NYT Freakonomics Blog
Is Okun's Law Really Broken?
“Okun’s law” is a much-loved rule of thumb - it links increases in the unemployment rate with decreases in output. The red dots in the chart below illustrate Brad DeLong’s version of this rule, which relates the change in output over the past eight quarters with the change in the unemployment rate. Most of these dots lie pretty close to the dashed line, which suggests a stable relationship. Based on this rule, and the relatively mild decline in measured output, you might have expected the unemployment rate to have risen by 3.5 percentage points over the past two years, to about 8 percent. But the dots at the top left show what actually happened-unemployment rose by something closer to 5.5 percentage points, and the unemployment rate is closer to 10 percent. That’s a big difference. And it has led many commentators to ask whether Okun’s Law is broken.
But perhaps the problem isn’t Okun’s Law. Perhaps the problem is how we measure output growth. In fact, there are two measures of output growth-the usual measure, which adds up total spending in the economy, and the alternative, which adds up total income. In theory, the two should be exactly the same. In practice, they have been very different during this recession. The blue dots show recent changes in this alternative measure of output. These GDI numbers suggest that output growth actually declined much more sharply than had been widely understood. Based on this alternative measure, the recent sharp rise in unemployment is no mystery at all...
What’s good news for Okun’s law, though, is bad news for the economy. This alternative measure of output growth suggests that the recession may have been deeper, and longer-lasting than previously thought, although data for the fourth quarter aren’t yet available. While many economists believe the recession ended in the second quarter of 2009, this income-based measure of output kept shrinking in the third quarter, too...
-Related-
The Economist
Unemployment figures: Slow going
Why is the recovery jobless? Maybe because it isn't a recovery
IN FEBRUARY, for the twenty-fifth time in 26 months, the American economy shed jobs. The toll-a decline of 36,000-was smaller than feared for a month of severe winter weather. But it was distressing nonetheless; another bit of evidence pointing towards a jobless recovery. Most economists estimate that the recession in America ended around the close of the second quarter of 2009, the last quarter in which GDP shrank. But during the second half of last year the economy still managed to lose more than a million jobs...
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.
The picture painted by GDI throughout the downturn is one of an economy substantially weaker than indicated by GDP: one more in line with the employment data and with the experience of most Americans. But whether productivity or unexpectedly weak growth is to blame for high unemployment, there is a danger that policymakers have failed to recognise the full extent of the slack in the economy. The result may be a disappointingly slow, fragile and jobless exit from recession.