The mystery of healthy job gains in the context of a sluggish GDP recovery may have been solved.
As Jeremy Nalewaik has observed, and as Nalewaik and Boragan Aruoba, Francis Diebold, Frank Schorfheide, and Dongho Song revisited last year, GDP(I), which measures economic output by tallying up all income generated by the economy’s activity, at times yields different results from GDP(E), which tallies up all expenditures and is far more commonly used. This is despite the fact that the two measures should be equivalent. Nalewaik has argued (pretty convincingly) that if we have to choose between the two approaches, there is a strong case for GDP(I), or GDI.
After presenting some basic facts about the estimates, section 3 discusses the initial growth rates and shows numerous results favoring GDP(I) growth. First, there is some evidence that the initial GDP(I) growth predicts revisions to GDP(E) growth, and no tendency for GDP(E) growth to predict revisions to GDP(I) growth. Second, initial GDP(I) growth is the better predictor of a wide variety of business cycle indicators that should be correlated with true output growth. These include all measures of output growth in subsequent periods, the change in the unemployment rate in the current period and subsequent periods, employment growth (measured using a household survey) in current and subsequent periods, the manufacturing purchasing managers index in current and subsequent periods, changes in stock prices over previous periods, the slope of the treasury yield curve in previous periods, and forecasts of GDP(E) growth itself from previous periods. Each of these results suggest GDP(E) growth is either the noisier measure of true output growth or misses ﬂuctuations in true output growth that appear in both GDP(I) growth and the other business cycle indicators. Third, initial GDP(I) growth has identiﬁed the onset of the last few cyclical downturns more quickly than initial GDP(E).
Cardiff Garcia of the FT interviewed Nalewaik on the usefulness of GDI last year.
So why does this matter now? Well, a very big gap opened up between GDP and GDI for the fourth quarter of 2011: while the annualized GDP growth estimate for those three months was 3 percent, the GDI estimate was 4.4%, as an Economix blogger notes.