I have been writing a bit about the Philly Fed’s GDPplus number which blends gross domestic product and gross domestic income to create a possibly more accurate take on economic growth. But a Deutsche Bank note out this morning from economist Joe LaVorgna makes the case for looking at GDI — and why that is good news for the US economy:
Last quarter’s difference between the income and product sides of the economy, the largest since Q3 2006, is evident in the chart [above]. … Economists prefer looking at the GDP figures, because they are timelier and more granular than the GDI figures. However, we believe the income data are more accurate because they are based off of tax receipts, and we know that individuals and businesses do not pay tax on phantom income. This is one reason why we look at employee tax receipts, which have accelerated from a 3% year-over-year rate in early November to around 5% at present.
This is broadly consistent with what we have seen in nonfarm payrolls and the workweek, both of which have been strengthened of late. If GDP growth is understated, as GDI suggests, the former data will either be revised higher and/or show a meaningful catch-up to GDI in the quarters immediately ahead.
In the process, financial market participants need to take note that economic activity will prove to be more resilient to rising rates than perhaps many believe, because rates will still be well below the level of nominal output.