The price-adjusted value of goods and services produced in the United States was 0.6% lower in April-June 2022 compared to the seasonally adjusted peak of October-December 2021. Real gross domestic product (GDP) has apparently fallen for two consecutive quarters.
But gross domestic income (GDI), which is released by the same government agency that compiles GDP, implies that the US economy has been in continuous growth since the end of 2021.
This disconnect is unusual, although there are precedents, particularly around slowdowns. But for now, this poses a serious headache. (I covered some of the issues in previous notes here and here.) Plus, that’s not even the only thing wrong right now if you dive deep into the numbers. The main things to know:
The drop in GDP seems to be due to problems in the manufacturing and energy sectors, but these figures seem inconsistent with the forecasts of the Federal Reserve. separate estimates of mining activity and motor vehicle production.
Employee Compensation and Small Business Income were are rising faster than prices, but not anymore.
The impact on total national income was more than offset by the withdrawal of government grants to businesses since the end of 2021. (Slowing take-home pay growth may not be pleasant, but the indicator that reflects overall economic activity is the amount of revenue generated organically by the private sector.)
Whichever metric you prefer, the pace of growth appears to be slowing and some higher frequency indicators imply that the economy may have already started to recover.
GDP is supposed to represent how many businesses and workers in a given country product each quarter. (Hence the name “national product.”) Ideally, the government would add up all of the revenue generated by companies operating in the United States, then subtract the total expenditures by American companies on inputs purchased from others to avoid the double counting. All that remains should represent the true value of what was produced in the United States And, in fact, the Bureau of Economic Analysis (BEA) Do itbut detailed figures are published only once a year after a long lag.
The most commonly quoted version of US GDP is therefore a Proxy of national production on the basis of the accounting identity sources = uses. For the whole world :
Production = Consumption + Fixed Investment + Changes in inventories
So, for any country:
Domestic Production = Domestic Consumption + Domestic Fixed Investment + Changes in Domestic Inventories + Exports - Imports
The BEA estimates these components by reviewing the monthly data that the government collects on prices, inventories, International exchange, retail and restaurant expenses, home sales, construction expensesand deliveries from manufacturers of capital goodsas well as data on tax receipts and government spending. (Other data sources are less frequent and come out with longer lags, like quarterly service surveywhich means that they are mainly used to revise the initial estimates.)
In descending order of importance, the BEA estimates that the real value of everything produced in the United States in 2022Q2 was 0.6% lower than in 2021Q4 due to:
A sharp slowdown in the rate of inventory accumulation which has reduced by 0.59 percentage points of GDP so far this year, mainly in the second quarter. Motor vehicles and food products were responsible for most of the slowdown. Inflation-adjusted stocks continue to rise rapidly, but not as rapidly as before. (What counts for GDP growth is the change in the change in the level of stocks.)
A sharp increase in the real value of imports of capital goods, motor vehicles and parts, and other durable consumer goods relative to exports of these items has reduced GDP by 0.44 percentage points since the end of 2021, mainly in the first quarter. Imports are not bad, but they must be subtracted from measures of domestic consumption and domestic investment to get an accurate estimate of domestic production.
Cuts to national defense and other federal spending, which reduced GDP by 0.21 percentage points in the first half of 2022.
A sharp slowdown in home buying in the second quarter, resulting in lower spending on “brokers’ commissions on the sale of residential structures and attached land, title insurance, taxes on national and local documentary stamps, attorney fees, title summary and receivership fees, and survey and engineering fees.This, combined with the slight decline in single-family housing starts and the the continued decline in spending on “improvements” since the peak in the 1st quarter of 2021, took off by 0.18 percentage points in the last two quarters.
The combined impact of these four forces in the first half of this year (1.43 percentage points) more than offset the modest contributions to growth implied by rising consumer spending (0.49 percentage points) and business investment (0.32 point).
The implication is that the brunt of the recession is being felt by US manufacturers (and, to a lesser extent, its farmers and miners). After all, they are the ones who produce the goods that other companies buy to store them and they are the ones most exposed to global competition, both through imports and exports.