The government released it's revised estimate of fourth quarter GDP yesterday and it contained something for everyone. The headline number was boring - the estimated growth of GDP remained at 3%. However, beneath the surface there was quite a bit of interesting information. There are different ways to measure the size of the economy including GDP and GDI, which should result in the same number. GDP (gross domestic product) estimates the size of the economy by combining total spending on goods and services produced in the US by consumers, business, government, and the rest of the world. As most people know, this is the number that gets the most attention. However, GDI (gross domestic income) is also a measure of the size of the economy and is estimated by adding the total income earned throughout the economy. Without getting into too much detail, the two numbers should be the same, differing only by measurement error (which is likely given a $15 trillion economy). The two numbers tend to track each other over time and differ only slightly. However, for short periods of time, they may paint somewhat different pictures of the strength of the economy. Some economists favor emphasizing GDO instead of GDP, making the case that it provides a more accurate picture of the economy (for example, click here).
While GDP indicated that the economy grew by 3% in the fourth quarter, GDI showed a stronger growth rate of 4.4%. Though GDI showed a weaker economy in the past, it points to relatively stronger growth in the second half of 2011. Some economists are thinking that may help explain the stronger than expected employment growth in recent months.
There was also information in the report for pessimists. When one strips out inventories (goods produced but not yet sold, etc.), instead of 3% growth, the economy grew by 1.1% in the fourth quarter. A build up in inventories also implies less need for production in future quarters. In addition, the growth in corporate profits declined. This isn't too much of a surprise since corporate profits had been soaring, but the growth of profits was still less than expected.
So how's the economy doing? Better, but still dealing with the effects of the crisis and facing headwinds from oil, Europe, and perhaps China.
