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Simultaneously Contracting and Expanding: The Economy’s Clear Mixed Signals


Sep 15, 2023

Last month, the U.S. Bureau of Economic Analysis updated its forecast for this year’s economic performance. In the first quarter, it increased by 2%, but then shrank by 1.8%. In the second quarter, it increased by 2.1%, but only grew by 0.5%. This discrepancy is due to the two different ways of measuring economic indicators, which often don’t add up.

The main indicator used to measure the size and growth of an economy is gross domestic product (GDP). This is the value of all final goods and services and is calculated by summing all expenditures on those goods and services. Consumer spending, investment, government spending, and net exports are all included in this measure. However, another way to measure economic size is by adding up all the money earned, which is called gross domestic income (GDI). These two measures, GDP and GDI, are not always aligned.

Since 1947, there have been only 11 quarters where expenses have matched income. This is because GDP and GDI are based on different data and independent sources. For example, a company may spend $1 million on a new product, but not sell all of those products until later in the year. This discrepancy between GDP and GDI can sometimes create a significant difference in the measurement of the economy.

This year, the GDP and GDI had a 1.9% difference, and their growth rates were in different directions. On an annual basis, GDP was up 2.5% year over year, while GDI was down 0.5%. This disparity makes some economists nervous, as in the past, the more pessimistic GDI measure has been more likely to be correct. However, the BEA, which provides these estimates, claims that the data underlying GDP is more reliable.

Despite the mixed signals, there are some positive signs in the economy. The manufacturing survey is improving, the healthcare sector is still recovering, and consumers are still spending. Combining GDP and GDI suggests that things are improving this year. However, the true state of the economy is likely somewhere in the middle, and there are various factors at play.

In conclusion, the measurement of economic indicators such as GDP and GDI can be complex and often do not align. This creates confusion about the state of the economy and makes it challenging to determine whether it is contracting or growing. While there are some positive signs, it is important to take all factors into account and rely on accurate and reliable data for a comprehensive understanding.

By Editor

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