The Philadelphia Fed has a GDP method that blends, not averages GDP and GDI. They revised the indicator significantly lower on Thursday.
Is GDP or GDI a Better Measure?
The Philadelphia Fed prefers GDI over GDP but it prefers a blend (not an average) which it calls GDPplus even more. Note that GDPE = GDP and GDPI = GDI in the discussion below.
The GDPplus Working Paper is mostly geekish math, but there are some readable snips.
In the U.S., in particular, two often-divergent GDP estimates exist, a widely-used expenditure-side version, GDPE [GDP], and a much less widely-used income-side version, GDPI [GDI].
Nalewaik (2010) and Fixler and Nalewaik (2009) make clear that, at the very least, GDPI deserves serious attention and may even have properties in certain respects superior to those of GDPE. That is, if forced to choose between GDPE and GDPI , a surprisingly strong case exists for GDPI . But of course one is not forced to choose between GDPE and GDPI , and a GDP estimate based on both GDPE and GDPI may be superior to either one alone. In this paper we propose and implement a framework for obtaining such a blended estimate.
Recession Outlook
After revisions (and what isn’t revised?), there has not been an instance where GDPplus was negative two quarters in a row when the economy was not in recession.
This is very unlike GDP which often has two quarters of negative GDP without the economy being in recession.
The problem is revisions. The first release of GDI is noisy.
GDPplus Recession Track Record
That’s a very impressive track record, with no misses and no false positives as long as one waits for the second revision to GDI.
In late 2022, I was positive the economy was in recession but look what happened.
Positive Revision Shock!
The Philadelphia Fed revised GDPplus higher reversed string of negative GDPplus numbers.
As revised, there was not a second consecutive quarter of negative GDPplus.
Q:Why the revisions?
A: Don’t blame GDPplus or the Philadelphia Fed. GDPplus is subject to huge revisions when the BEA revises GDP and GDI.
It’s important to note that the highlighted area is 5 months. That’s not quite two quarters. I think that 5 months is the minimum time needed for confirmation of the indicator.
This is not a real-time indicator. There isn’t any.
Q1 GDP Revised Lower, Q4 GDI Significantly Lower
Yesterday, I commented More Soft Economic Data, Q1 GDP Revised Lower, Q4 GDI Significantly Lower
Significant Negative Revisions
- 2024 Q1 GDP went from 1.6 percent to 1.3 percent.
- Based on updated data from the Bureau of Labor Statistics Quarterly Census of Employment and Wages program, Wages and salaries are now estimated to have increased $58.5 billion in the fourth quarter, a downward revision of $73.0 billion.
- Real gross domestic income is now estimated to have increased 3.6 percent in the fourth quarter, a downward revision of 1.2 percentage points from the previously published estimate of 4.8 percent.
The BEA revised GDI for 2024 Q4 from 4.8 percent to 3.6 percent. This resulted in major revisions to GDPplus.
How the 2024 Q1 GDP Update Impacted GDPplus
- GDPplus for 2024 Q1 went from 2.6 to 2.1
- GDPplus for 2023 Q2 went from 3.5 to 2.7
- GDPplus for 2023 Q3 went from 2.3 to 2.1
Note that the Philadelphia Fed had a GDPplus estimate for 2024 Q1 before GDI for 2024 Q1 was even released.
No Recession Signal Yet
The BEA and Philadelphia Fed both significantly lowered their estimates, but I doubt GDPplus for Q1 goes negative from 2.1 percent or GDI negative from 1.5 percent.
However, I do expect more revisions, all negative.
Is the US in Recession Now? Two Prominent Competing Views
I discussed another recession indicator in my May 28 post Is the US in Recession Now? Two Prominent Competing Views
Please give that post a look if you haven’t. It’s very meaty with a detailed look at the McKelvey recession indicator.
I intend to do a follow-up post on McKelvey next week. As of right now, I do not think we are in recession yet, with emphasis on yet.
I have this comment from Lacy Hunt “Payroll jobs overshot the QCEW in Q3 and Q4 in 2024 and the BED in Q3. Given the weakness in many indicators in Q1/24, then for me it is very likely that payroll survey continued to overshoot in Q1/24. The pattern of downward revisions will continue. This happened in at critical turning points in the past including 2008.“
I discuss the BED data and negative job revisions in my link above.
I am confident the US will be in recession this year.
Label the recession murder by poison.
