Sunday, May 20, 2007

Reuters: Economy may be growing faster than GDP data shows

Echoing some of the themes I have been focusing on, I see a Reuters article by Joanne Morrison entitled "Economy may be growing faster than GDP data shows" which tells us that "Signs of unexpected vigor in the job market are among several factors that may mean the economy may be performing better than gross domestic product data suggests" and that " the meager increase in U.S. GDP in the first three months of this year comes against a backdrop of other data showing a pickup in manufacturing, steady hiring, strong corporate profits, and stable worker income growth."

The article notes that "Even Federal Reserve officials are puzzled and say the indicator mismatch is making their job in setting interest rates more difficult." One Fed official is quoted as saying that we don't have comparable indicators for the service sector that we have for the manufacturing sector.

The article tells us that maybe we should be focusing more on income growth:

A big gap has opened between the growth of GDP, the standard yardstick of economic activity, and gross domestic income or GDI, which measures the economy in terms of the income derived from wages and salaries, in addition to profits.

Over the course of last year, the year-over-year growth rate of nominal GDI was on average 0.5 percentage points higher than the growth of nominal GDP.

Further, that last sentence refers to nominal GDP, failing to note that headline real GDP growth is billed as being much lower than nominal GDP growth due to a misleading inflation adjustment in Q1, so the gap is much greater than 0.5%.

The good news is that the Fed economists do in fact examine all of the dis-aggregated economic reports rather than using the one-size-fits-all headline real GDP numbers.

-- Jack Krupansky

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