When the U.S. economy recorded back-to-back quarters of negative economic growth—the technical definition of a recession—in the first half of 2022, the White House dismissed the data.
Administration officials and a chorus of economists argued that the labor market was tight, retail sales were up, and household finances were in good shape. As a result, it would be difficult to surmise that the national economy was in the middle of a downturn, they said.
Instead of relying on the widely watched gross domestic product (GDP) data to determine the economy’s health, the White House was monitoring gross domestic income (GDI), according to Treasury Secretary Janet Yellen.
“Our broad and inclusive recovery has outpaced that of many other large economies. And measured by gross domestic income, our economy continues to expand and is operating above levels that would have been predicted pre-pandemic,” Yellen said in a September 2022 speech at the Ford Rouge Electric Vehicle Center.
Her comments followed the Treasury stating in a July blog post that the gap between the GDP and GDI was “one important piece of evidence that shows stronger growth for the U.S. economy.” The post noted that the gross domestic outcome (GDO) “provides a rule of thumb to infer the true rate of economic growth.”
Understanding GDI and GDO
The GDI is a gauge of all the income generated by households, companies, and governments in the production of finished goods and services. The GDO is an average of the headline GDP and GDI numbers, which became “a better measure of economic growth” in the Obama administration.“Because there are partially uncorrelated measurement errors in both GDP and GDI, combining them can increase overall accuracy,” the Council of Economic Advisers wrote in July 2015. “In fact, the simple average—what we have called GDO—of the initial estimates historically have been a better gauge of the latest and presumably most accurate estimates of GDP growth than either GDP or GDI individually as well as a more stable predictor of future economic growth. Moreover, using GDO helps at least partially to resolve some recent economic anomalies.”
However, E.J. Antoni, a research fellow and public finance economist at the Grover M. Hermann Center for the Federal Budget, doesn’t think one economic indicator is more reliable than the other.
GDP and GDI each possess their own collection methods, potentially causing discrepancies in the short term, although “they trend very tightly together over the long run,” he noted.
“GDP data is timelier, with the advance estimate being available a month before the corresponding GDI estimate, which is just one of the reasons why GDP is discussed more broadly,” Antoni told The Epoch Times. “Neither one is strictly more reliable than the other as an economic indicator, but GDP has essentially been the yardstick for the entire postwar period, with two consecutive quarters of negative GDP growth constituting a recession.”
The numbers highlight that “Yellen’s words have come back to haunt her yet again,” Antoni recently wrote in an op-ed.
The real GDI has contracted in four of the past five quarters, according to the Bureau of Economic Analysis. This included rates of negative 3.3 percent in the fourth quarter of 2022 and negative 2.3 percent in the first quarter of 2023. The GDO recorded the same downward trend: negative 0.35 percent in the fourth quarter and negative 0.5 percent in the first quarter.
David Rosenberg, founder of Rosenberg Research, quickly pounced on the data in May to declare on Twitter that “the recession has arrived and nobody’s noticed.”
Interest Rates and Anemic Growth
For now, the expectation is that the United States could be going through a period of anemic and below-trend growth. During his semiannual monetary policy report to Congress last week, Federal Reserve Chairman Jerome Powell noted that this type of economic climate would be necessary to bring down inflation to the central bank’s 2 percent target.Since 1948, the GDP annual growth rate has averaged above 3 percent. Last year, the real GDP growth rate was 2.1 percent.
The Federal Reserve Bank of Atlanta’s GDPNow model estimate suggests that the U.S. economy will grow by 1.9 percent in the second quarter.
It’s estimated that it can take up to 24 months for the full effects of monetary policy, particularly interest rate changes, to spread through the economic landscape. With the Fed only recently enacting rates to a target range of 5–5.25 percent, the United States might not witness the effects of a high benchmark federal funds rate for at least another year.
After the policy-making Federal Open Market Committee updated the Summary of Economic Projections, which raised the median policy rate to 5.6 percent from 5.1 percent, investors are abandoning hopes of a rate cut later this year.
Scott Anderson, chief economist at Bank of the West, says the jump in short-term Treasury yields has mostly removed the chances of a rate cut this year. This, according to Anderson, signals “an even higher probability of a recession over the next twelve months.”
“This is what might be required to rebalance supply and demand and put inflation on a sustainable course,” he wrote in a research note. “Despite continuing signs of an economic downturn ahead, the Fed and other major central banks have made clear this month that inflation remains the biggest economic threat in their eyes and the primary driver of their monetary policy decisions.”
Consumption has been mostly robust even in the current inflationary environment, supported by households’ pandemic-era savings. However, with elevated prices and higher borrowing costs, JPMorgan Chase estimates that they'll be drained by October, which could have consequences for an economy that’s two-thirds driven by consumer spending.
“Virtually every economic indicator is pointing to a recession later this year,” Antoni said. “While some data indicate the economy is already contracting, there are still signs of anemic growth.”
The Conference Board’s Leading Economic Index (LEI), for example, is a chief recession indicator, and it keeps signaling a recession after sliding by 0.7 percent in May. The LEI, which assesses various data such as credit conditions, consumer expectations, manufacturing orders, and Treasury yields, is down by 4.3 percent over the six-month period between November 2022 and May.
Yellen thinks there’s a falling risk of the United States slipping into a recession, noting during an interview with Bloomberg on June 23 that a slowdown in consumer spending might be necessary to finish the fight against inflation.
