Connect with us

Uncategorized

What’s Behind The Record Divergence Between GDP and GDI, And Why Tomorrow The US Economy Will Be Revised Sharply Lower

What’s Behind The Record Divergence Between GDP and GDI, And Why Tomorrow The US Economy Will Be Revised Sharply Lower

Tomorrow morning years…

Published

5 months ago

on

What's Behind The Record Divergence Between GDP and GDI, And Why Tomorrow The US Economy Will Be Revised Sharply Lower

Tomorrow morning years of politically-motivated upward drift in US economic "data" will get their come to Jesus moment of gravitational reacquaintance: at 8:30am ET on Thursday, alongside the final Q2 GDP print (expected unchanged at 2.2%) the BEA will also publish its once-every-five-years revision of GDP from Q1 2005 to Q1 2023, which according to Morgan Stanley will lead to a sharp downward revision, of as much as 80bps from Q2 GDP, and could potentially even indicate economic contraction in the first half of 2023.

There are several reasons why GDP may be revised right off the proverbial cliff, but chief among them is the previously discussed record divergence between GDP and GDI, two series which - in theory - should be identical.

Besides GDP, Gross domestic income (GDI) and select income components will also be revised from Q1 1979 through Q1 2023, but as Morgan Stanley explained previously, the likely drift in revisions will be toward a lower GDP and higher GDI. This is how the bank's chief US economist Ellen Zentner explained it previously:

GDP will likely be revised down toward GDI. Not only does the GDI/GDP gap tend to close in absolute terms, but we also find evidence that GDP usually converges toward GDI in YoY% rates. Exhibit 4 shows the relationship between the percentage point difference between GDI and GDP before the revision (latest quarter available before revision, YoY%) and the change in GDP growth rate after the revision (pp difference after vs before). There is a positive link between the two variables suggesting that a negative GDI/GDP difference like the one we have now might result in a downward revision to GDP. In Exhibit 4 we show two linear fits, one using the 20-year sample and the other only focusing on the revisions where the GDI/GDP gap closed, with a stronger link between the variables. Using the predictions from these simple models, we would expect to see a downward revision to 2Q 23 YoY% GDP of as much as -50bp to -80bp

And while we discussed all this and more previously, a key question some may ask is what is the reason behind the massive divergence between GDP and GDI?

For the answer we go to a recent note from JPM chief economist Michael Feroli who correctly notes that one dark cloud hanging over the US economic outlook all year has been the very weak performance of real gross domestic income (GDI), which has contracted 0.5% over the past four quarters.

As noted before, GDI should equate with GDP, and past research has indicated that averaging GDI with GDP (also called GDO, or gross domestic output) provides a better measure of the underlying growth of economic activity than either measure viewed in isolation. Obviously, incorporating GDI clearly sends a more downbeat message about the economy’s recent performance, and suggests that the surge in the US Dollar and 10Y yields are just huge headfakes, and once the revised data is released we could see a brutal mean reversion in both the greenback and US Treasuries.

But going back to the key question - what is behind the record difference between GDP and GDI - Feroli answers that this is the result of previously omitted net interest payments by the Federal Reserve, which will be corrected by tomorrow's data revision, thereby boosting GDI. By itself this revision would close about half of the gap between these two broadest measures of the size of the economy.

As Feroli explains next, "consistent with their legal status, the National Income and Product Accounts (NIPAs) consider the Federal Reserve banks to be financial corporate businesses." Their contribution to GDI has so far been in corporate profits, which track closely to the net income of the Federal Reserve system. Recently, the profits of the Federal Reserve banks have rapidly deteriorated, contributing to the weakness in GDI.

This deterioration has been the result of ballooning interest payments on the Fed’s liabilities as short-term interest rates have increased (this would also explain the confusion experienced by Albert Edwards recently when he looked at a variation of this chart to conclude that it was "The Maddest Macro Chart I Have Seen In Many Years").

So to address the unprecedented collapse in Fed profits as a result of soaring interest rates...

... In June, the BEA discussed how in the upcoming annual revision of the NIPAs they will begin recording interest paid by the Federal Reserve banks. Like corporate profits, net interest payments are an element of corporate operating surplus, which is an element of GDI. This methodological revision updates the NIPAs to keep them more consistent across accounts considering the Fed’s relatively newfound ability to pay interest.

What does this mean for the record statistical discrepancy using between GDP and GDP? The answer comes from data pulled from the Fed’s balance sheet and administered interest rates. (Although the BEA documentation is ambiguous, JPM assumes that all paid liabilities will be recorded, including those for the overnight reverse repo facility).

This inclusion would cut in half the statistical discrepancy in 2Q23, bringing it down from 1.8% of GDP to 0.9%.

In other words, this revision would still leave real GDI growth negative in 4Q22 and 1Q23 - suggesting that GDP would also be revised negative for two quarters, potentially springing an unexpected recession on the US - but would raise the annualized growth in those quarters by about 1%-pt.

The inclusion of Fed interest payments in GDI isn’t the only component that will be revised later this month. The inclusion of more complete data could push estimates of GDP and GDI either up or down. That said, JPM agrees with Morgan Stanley that there is a tendency for GDP and GDI to be revised toward each other. This fact, suggests that while GDI may not look so worrisome in another three weeks, GDP will also see some very substantive haircuts which may effectively eliminate much if not all purported "growth" in 2023.

Finally, Deutsche Bank's Jim Reid agrees, and in a recent note he writes that while tomorrow's revisions could make GDI look more healthy (interest payments add income to parts of the economy) they could "also make interest costs in the economy look more realistic and hurt fundamental models of interest cover for those indebted." As such, "the revisions are potentially an important event and could make us think differently about the US economy in the recent past and therefore the future" especially if it is revealed that due to faulty data, the Fed kept hiking in the first half of 2023 even though true GDP was flat if not outright negative.

And if the sharp historical revision to GDP wasn't enough, the coming plunge in Q4 GDP on the back of...

  • The resumption of student loan payments, which will subtract (at least) 0.5% (and likely much more) from quarterly annualized GDP growth
  • The government shutdown which will reduce quarterly annualized growth by 0.2% for each week it lasts
  • The ongoing UAW auto strike which reduces quarterly annualized growth by 0.05-0.10% for each week it lasts.

...which will almost certainly push the economy into contraction, should be sufficient to put a sharp stop to any further surge in either the dollar or US interest rates.

More in the GDI/GDP reports from JPM, DB and Morgan Stanley

Tyler Durden Wed, 09/27/2023 - 21:20

Read More

Related Topics:
Continue Reading

Uncategorized

February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…

Published

13 hours ago

on

March 9, 2024

By

By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

Read More

Continue Reading

Uncategorized

Mortgage rates fall as labor market normalizes

Jobless claims show an expanding economy. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

Published

1 day ago

on

March 8, 2024

By

Everyone was waiting to see if this week’s jobs report would send mortgage rates higher, which is what happened last month. Instead, the 10-year yield had a muted response after the headline number beat estimates, but we have negative job revisions from previous months. The Federal Reserve’s fear of wage growth spiraling out of control hasn’t materialized for over two years now and the unemployment rate ticked up to 3.9%. For now, we can say the labor market isn’t tight anymore, but it’s also not breaking.

The key labor data line in this expansion is the weekly jobless claims report. Jobless claims show an expanding economy that has not lost jobs yet. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

From the Fed: In the week ended March 2, initial claims for unemployment insurance benefits were flat, at 217,000. The four-week moving average declined slightly by 750, to 212,250


Below is an explanation of how we got here with the labor market, which all started during COVID-19.

1. I wrote the COVID-19 recovery model on April 7, 2020, and retired it on Dec. 9, 2020. By that time, the upfront recovery phase was done, and I needed to model out when we would get the jobs lost back.

2. Early in the labor market recovery, when we saw weaker job reports, I doubled and tripled down on my assertion that job openings would get to 10 million in this recovery. Job openings rose as high as to 12 million and are currently over 9 million. Even with the massive miss on a job report in May 2021, I didn’t waver.

Currently, the jobs openings, quit percentage and hires data are below pre-COVID-19 levels, which means the labor market isn’t as tight as it once was, and this is why the employment cost index has been slowing data to move along the quits percentage.  

2-US_Job_Quits_Rate-1-2

3. I wrote that we should get back all the jobs lost to COVID-19 by September of 2022. At the time this would be a speedy labor market recovery, and it happened on schedule, too

Total employment data

4. This is the key one for right now: If COVID-19 hadn’t happened, we would have between 157 million and 159 million jobs today, which would have been in line with the job growth rate in February 2020. Today, we are at 157,808,000. This is important because job growth should be cooling down now. We are more in line with where the labor market should be when averaging 140K-165K monthly. So for now, the fact that we aren’t trending between 140K-165K means we still have a bit more recovery kick left before we get down to those levels. 




From BLS: Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.

Here are the jobs that were created and lost in the previous month:

IMG_5092

In this jobs report, the unemployment rate for education levels looks like this:

  • Less than a high school diploma: 6.1%
  • High school graduate and no college: 4.2%
  • Some college or associate degree: 3.1%
  • Bachelor’s degree or higher: 2.2%
IMG_5093_320f22

Today’s report has continued the trend of the labor data beating my expectations, only because I am looking for the jobs data to slow down to a level of 140K-165K, which hasn’t happened yet. I wouldn’t categorize the labor market as being tight anymore because of the quits ratio and the hires data in the job openings report. This also shows itself in the employment cost index as well. These are key data lines for the Fed and the reason we are going to see three rate cuts this year.

Read More

Continue Reading

Uncategorized

Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January…

Published

1 day ago

on

March 8, 2024

By

Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January jobs report was the "most ridiculous in recent history" but, boy, were we wrong because this morning the Biden department of goalseeked propaganda (aka BLS) published the February jobs report, and holy crap was that something else. Even Goebbels would blush. 

What happened? Let's take a closer look.

On the surface, it was (almost) another blockbuster jobs report, certainly one which nobody expected, or rather just one bank out of 76 expected. Starting at the top, the BLS reported that in February the US unexpectedly added 275K jobs, with just one research analyst (from Dai-Ichi Research) expecting a higher number.

Some context: after last month's record 4-sigma beat, today's print was "only" 3 sigma higher than estimates. Needless to say, two multiple sigma beats in a row used to only happen in the USSR... and now in the US, apparently.

Before we go any further, a quick note on what last month we said was "the most ridiculous jobs report in recent history": it appears the BLS read our comments and decided to stop beclowing itself. It did that by slashing last month's ridiculous print by over a third, and revising what was originally reported as a massive 353K beat to just 229K,  a 124K revision, which was the biggest one-month negative revision in two years!

Of course, that does not mean that this month's jobs print won't be revised lower: it will be, and not just that month but every other month until the November election because that's the only tool left in the Biden admin's box: pretend the economic and jobs are strong, then revise them sharply lower the next month, something we pointed out first last summer and which has not failed to disappoint once.

To be fair, not every aspect of the jobs report was stellar (after all, the BLS had to give it some vague credibility). Take the unemployment rate, after flatlining between 3.4% and 3.8% for two years - and thus denying expectations from Sahm's Rule that a recession may have already started - in February the unemployment rate unexpectedly jumped to 3.9%, the highest since February 2022 (with Black unemployment spiking by 0.3% to 5.6%, an indicator which the Biden admin will quickly slam as widespread economic racism or something).

And then there were average hourly earnings, which after surging 0.6% MoM in January (since revised to 0.5%) and spooking markets that wage growth is so hot, the Fed will have no choice but to delay cuts, in February the number tumbled to just 0.1%, the lowest in two years...

... for one simple reason: last month's average wage surge had nothing to do with actual wages, and everything to do with the BLS estimate of hours worked (which is the denominator in the average wage calculation) which last month tumbled to just 34.1 (we were led to believe) the lowest since the covid pandemic...

... but has since been revised higher while the February print rose even more, to 34.3, hence why the latest average wage data was once again a product not of wages going up, but of how long Americans worked in any weekly period, in this case higher from 34.1 to 34.3, an increase which has a major impact on the average calculation.

While the above data points were examples of some latent weakness in the latest report, perhaps meant to give it a sheen of veracity, it was everything else in the report that was a problem starting with the BLS's latest choice of seasonal adjustments (after last month's wholesale revision), which have gone from merely laughable to full clownshow, as the following comparison between the monthly change in BLS and ADP payrolls shows. The trend is clear: the Biden admin numbers are now clearly rising even as the impartial ADP (which directly logs employment numbers at the company level and is far more accurate), shows an accelerating slowdown.

But it's more than just the Biden admin hanging its "success" on seasonal adjustments: when one digs deeper inside the jobs report, all sorts of ugly things emerge... such as the growing unprecedented divergence between the Establishment (payrolls) survey and much more accurate Household (actual employment) survey. To wit, while in January the BLS claims 275K payrolls were added, the Household survey found that the number of actually employed workers dropped for the third straight month (and 4 in the past 5), this time by 184K (from 161.152K to 160.968K).

This means that while the Payrolls series hits new all time highs every month since December 2020 (when according to the BLS the US had its last month of payrolls losses), the level of Employment has not budged in the past year. Worse, as shown in the chart below, such a gaping divergence has opened between the two series in the past 4 years, that the number of Employed workers would need to soar by 9 million (!) to catch up to what Payrolls claims is the employment situation.

There's more: shifting from a quantitative to a qualitative assessment, reveals just how ugly the composition of "new jobs" has been. Consider this: the BLS reports that in February 2024, the US had 132.9 million full-time jobs and 27.9 million part-time jobs. Well, that's great... until you look back one year and find that in February 2023 the US had 133.2 million full-time jobs, or more than it does one year later! And yes, all the job growth since then has been in part-time jobs, which have increased by 921K since February 2023 (from 27.020 million to 27.941 million).

Here is a summary of the labor composition in the past year: all the new jobs have been part-time jobs!

But wait there's even more, because now that the primary season is over and we enter the heart of election season and political talking points will be thrown around left and right, especially in the context of the immigration crisis created intentionally by the Biden administration which is hoping to import millions of new Democratic voters (maybe the US can hold the presidential election in Honduras or Guatemala, after all it is their citizens that will be illegally casting the key votes in November), what we find is that in February, the number of native-born workers tumbled again, sliding by a massive 560K to just 129.807 million. Add to this the December data, and we get a near-record 2.4 million plunge in native-born workers in just the past 3 months (only the covid crash was worse)!

The offset? A record 1.2 million foreign-born (read immigrants, both legal and illegal but mostly illegal) workers added in February!

Said otherwise, not only has all job creation in the past 6 years has been exclusively for foreign-born workers...

Source: St Louis Fed FRED Native Born and Foreign Born

... but there has been zero job-creation for native born workers since June 2018!

This is a huge issue - especially at a time of an illegal alien flood at the southwest border...

... and is about to become a huge political scandal, because once the inevitable recession finally hits, there will be millions of furious unemployed Americans demanding a more accurate explanation for what happened - i.e., the illegal immigration floodgates that were opened by the Biden admin.

Which is also why Biden's handlers will do everything in their power to insure there is no official recession before November... and why after the election is over, all economic hell will finally break loose. Until then, however, expect the jobs numbers to get even more ridiculous.

Tyler Durden Fri, 03/08/2024 - 13:30

Read More

Continue Reading

Trending