- Gross domestic income looks weak, Goldman Sachs said, which could indicate a recession may be around the corner.
- But the bank said the data is based on revisions in GDI requirements.
- If revised upward, it would likely show the US economy growing “above capacity.”
Goldman Sachs wrote in a weekend note that falling gross domestic income can often be a precursor to a recession, but this time, the metric’s decline is likely a statistical illusion.
In the third quarter of 2023, GDI declined by 0.1% year-on-year. The decline pushes the GDP-to-GDI spread to its highest level in three decades, raising doubts about how resilient the US economy really is.
Although the two statistics focus on different inputs, both measure economic activity, and technically should reflect each other. Although there is often some divergence between the two, stronger divergence may mean that one or the other is misrepresenting economic conditions.
Real GDP in the third quarter was 2.6% higher than GDI.
But it is likely that this wide gap will narrow once the GDI data is revised, Goldman Sachs analysts led by Jan Hatzius wrote.
“GDI growth has sometimes been weak just before the economy went into recession, which has led some commentators to overestimate it as a sign of a turnaround in economic growth,” he said. “However, we see some solid reasons why the GDI likely underestimates growth.”
GDI measures activity through income, wages, interest and dividends rather than focusing on expenditures. Goldman Sachs said this includes net interest payments, an often poorly calculated metric.
Current projections appear to see interest payments falling by 38% from the third quarter of 2022 onwards, to their lowest level since 2004 in nominal terms. But this is inconsistent with the Federal Reserve’s rate hikes and rising Treasury bond yields.
But the Bureau of Economic Analysis, which measures GDI, has a history of revising initial metric estimates in the same direction as the federal funds rate.
GDI may also be overstated because corporate profits are underestimated in the measure, as earlier tax changes tilted BEA’s estimates downwards. Meanwhile, the decline in capital gains and the inclusion of old state and local government enterprises in the data are also artificially distorting the metric.
“To estimate ‘true’ growth over the four quarters to 2023Q3, we will use the average of GDP (2.9%) and GDI adjusted for our four distortions (1.3%), Goldman Sachs wrote. “The resulting 2.1% estimate implies that the U.S. economy grew at a pace near or slightly above capacity.”