Thanks to a disappointing June retail sales report, banks across Wall Street are cutting their second-quarter GDP forecasts. Barclays and Citi, for instance, are now looking for growth of just 0.5% annualized. JPMorgan thinks the data add “some downside risk to our 1.0% GDP number for last quarter.”
Now remember, this follows meager GDP growth of 1.8% in the first three months of the year. So overall the first half of 2013 is shaping up as weaker than the first six months of last year when the economy expanded by 2.0% in the first quarter and 1.3% in the second quarter.
But there has actually been a bit more employment growth in the first half of this year than in the first half of 2012, 1.2 million jobs versus 1.1 million jobs. And to some analysts, there is a mismatch between OK job growth and really weak GDP growth. Mike Feroli of JPMorgan:
Two questions that the really lousy Q2 GDP tracking raise are (i) how will the disconnect between weak GDP and solid payrolls be resolved and (ii) how will the FOMC feel about pulling its foot off the gas while looking at what could be a zero-handle on the most recent GDP print.
Another JPMorgan economist, James Glassman, echoes that question and offers a possible answer:
Pay no attention to the Q2 GDP report to be released on July 31. Maybe the 14th comprehensive revision to the National Income Accounts released at the same time will bring GDP figures back in the game. It would help to know how employment has been growing almost 2 percent annually. Don’t say productivity: that’s a cop out.
That’s right, the Commerce Department is revising GDP statistics going back to 1929. Maybe they will show the economy growing faster than first calculated.
There is also another bit of evidence that GDP numbers are understating economic strength. There has been an unusually large discrepancy between GDP, which measures goods and services the economy produces, and GDI, or gross domestic income, which measures the income generated by the production process. The two numbers should be more or less the same since everyone’s cost is someone else’s income. Looking at nominal GDP and GDI, economist Scott Sumner makes the following observation:
Over the past 6 months NGDP has grown at an annual rate of 2.19%, whereas NGDI (which measures exactly the same thing!) has grown at a rate of 5.06%. I suspect the truth is somewhere in between but closer to the 5.06%. Here’s why:
1. The labor market has been fairly strong over the last 6 months, with job creation accelerating from the middle of last year.
2. All sorts of asset markets (stocks, house prices, bonds, etc) suggest stronger US growth.
3. US consumer confidence has been strengthening.
4. I am not aware of any data confirming an ultra-low 2.19% NGDP growth rate. At that rate there shouldn’t have been any jobs created over the past 6 months.
A 2010 Fed paper finds “considerable evidence suggests that the growth rates of [GDI] better represent the business cycle fluctuations in true output growth than do the growth rates of [GDP].” Indeed, GDI showed a deeper Great Recession and now a stronger recovery. And a 2011 paper suggests combining the two for a truer measure.
So no boom, but the expansion might not be quite as wimpy as the headline numbers show.