GDP masked depth of recession1

Thu, Mar 18 2010

By Emily Kaiser

WASHINGTON (Reuters) - The most commonly used measure of the U.S. economy's output understated the depth of

the latest recession and may be overstating the pace of recovery, a Federal Reserve economist said.

In a paper released on Thursday, Federal Reserve Board economist Jeremy Nalewaik said an alternative measure that

looks at income rather than spending gave a more accurate view of the economy's performance.

The study raises questions about whether policymakers could or should have done more to combat the recession that

officially began in December 2007 had they known sooner the true depth of the downturn.

While Nalewaik did not address that point directly, he suggested that government data agencies put more emphasis on

their measures that look at income rather than spending.

At issue is the difference between gross domestic product and gross domestic income. Both gauge economic activity,

but GDP, which is the most widely used measure, tracks spending while the less-known GDI looks at income.

"These two measures have shown markedly different business cycle fluctuations over the past 25 years, with GDI

showing a more pronounced cycle than GDP," Nalewaik wrote in a research paper released as part of a Brookings

Institution conference.

"These differences have become particularly glaring over the latest cyclical downturn, which appears considerably

worse along several dimensions when looking at GDI," he said.

For example, while the official GDP data shows the economy resumed growing in the third quarter of 2009 -- leading

many economists to conclude the recession probably ended in June -- the GDI data shows no such rebound.

Based on GDI, the economy also looked far weaker in 2007, registering two negative quarters before the recession

officially began. GDP figures show the economy expanded in every quarter of 2007.

MYSTERY SOLVED?

Some private economists have noted the discrepancy between GDP and GDI. David Rosenberg, chief economist at

money management firm Gluskin Sheff, wrote in a note to clients last week that GDI was still contracting in the third

quarter of 2009, and pointed out that the gap between GDP's measure of the economy and GDI's was the largest on

record.

Rosenberg, well known for his bearish views of the economy, said the gloomier GDI figures may help explain some of

the mysteries about this business cycle, such as why job losses were far more severe than would be expected given

the level of GDP.

That is a critical point for President Barack Obama, who has made job creation his top policy priority. His administration

drew criticism for predicting that the $787 billion stimulus package approved last year would cap unemployment.

Instead, the jobless rate kept rising sharply, and now stands at 9.7 percent.

Likewise, the findings could raise questions about the timing of the Fed's interest rate moves. The central bank began

cutting its benchmark rate in September 2007, and the pace of rate cuts picked up dramatically in 2008, but the GDI

figures show contraction as early as the first quarter of 2007.

Both sets of data are released by the U.S. Commerce Department, but they include somewhat different information,

and the first estimate of quarterly GDP figures are available at least one month earlier than GDI.

One of the critical differences is that GDP data excludes sole proprietors and some small businesses while GDI

captures those companies through tax data. This was particularly important during the latest recession, which hit small

businesses particularly hard.

Many economists think the government's closely watched monthly employment data missed heavy job losses from

small businesses. In February, the U.S. Labor Department revised its payrolls data to show there were 1.2 million more

jobs lost in the recession, bringing the grand total to 8.4 million.

The debate over GDP vs. GDI has raged in academic and government data circles for years. Nalewaik said his

findings showed that the government ought to do a better job of highlighting the GDI figures, perhaps by featuring them

more prominently in their press releases.

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"All the results in this report suggest that the current reporting practice of the BEA (Bureau of Economic Analysis),

which puts nearly exclusive emphasis on GDP over (GDI), is sub-optimal statistically," he said.

(Editing by Andrea Ricci)