The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
- BLS Handbook of Methods
- Bureau of Economic Analysis
- Bureau of Labor Statistics
- Congressional Budget Office
- Economic Data - FRED® II, St. Louis Fed
- Office of Management and Budget
- Statistics: Releases and Historical Data, Board of Governors
- U.S. Census Bureau Economic Programs
- White House Economic Statistics Briefing Room
March 12, 2010
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.
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 Hamilton 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.
If true, this pattern could raise questions about current levels of productivity and associated labor cost measures. The decline in unit labor costs over the recession has been remarkable by either measure. But the recent drop in unit labor costs by way of the expenditure-side estimate was roughly 1.5 percentage points larger than the labor cost estimate that would be computed from the income side of the accounts. If revisions going forward continue to favor the income-side estimates, then maybe downward wage pressure—while probably still large—may be less than many believe.
By Laurel Graefe, senior economic research analyst, and Jacob Smith, quantitative research analysis specialist, both at the Atlanta Fed
TrackBack URL for this entry:
Listed below are links to blogs that reference A look at the income-side estimates of growth:
- What’s Moving the Market’s Views on the Path of Short-Term Rates?
- Lockhart Casts a Line into the Murky Waters of Uncertainty
- How Will Employers Respond to New Overtime Regulations?
- How Good Is The Employment Trend? Decide for Yourself
- Is the Labor Market Tossing a Fair Coin?
- When It Rains, It Pours
- Pay As You Go: Yes or No?
- Was May's Drop in Labor Force Participation All Bad News?
- Wage Growth for Job Stayers and Switchers Added to the Atlanta Fed's Wage Growth Tracker
- Experts Debate Policy Options for China's Transition
- July 2016
- June 2016
- May 2016
- April 2016
- March 2016
- February 2016
- January 2016
- November 2015
- October 2015
- September 2015
- Business Cycles
- Business Inflation Expectations
- Capital and Investment
- Capital Markets
- Data Releases
- Economic conditions
- Economic Growth and Development
- Exchange Rates and the Dollar
- Fed Funds Futures
- Federal Debt and Deficits
- Federal Reserve and Monetary Policy
- Financial System
- Fiscal Policy
- Health Care
- Inflation Expectations
- Interest Rates
- Labor Markets
- Latin America/South America
- Monetary Policy
- Money Markets
- Real Estate
- Saving, Capital, and Investment
- Small Business
- Social Security
- This, That, and the Other
- Trade Deficit
- Wage Growth