One Quarter, Three Different Economies
Output says growth slowed. Income says it nearly doubled.
Growth slowed to 1.5 percent in the spring. That was the sentence, and every outlet ran a version of it.
The figure is real. Real gross domestic product rose at a 1.5 percent annual rate in the second quarter, the Bureau of Economic Analysis reported.
The first quarter had run 2.1 percent. That pair of numbers is the slowdown the coverage described.
The same release carried a second number for the same three months. Real gross domestic income rose 2.2 percent, up from 1.2 percent in the first quarter.
Both measure the same American economy. One says growth slowed by nearly a third, and the other says it nearly doubled.
They are not two different things. Everything produced in a country is sold for some amount, and that amount becomes somebody's income.
Output and income are the same quantity counted from opposite ends. In a perfect accounting they would match to the decimal.
They do not match, and the reason is that the two sides are built from different paperwork. The output side comes from surveys of spending, shipments, and construction.
The income side comes from wages, profits, rents, and interest, drawn largely from tax records. Those records arrive later and on a different schedule.
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This is an output-income drift. Two counts of one economy pull apart because they are assembled from separate evidence.
The distance between them is not an error either side can see. Neither count knows what the other one missed.
The accounts carry a line for that difference. It is called the statistical discrepancy, and it exists because the two sides never close on their own.
The agency also prints the average of the two. That average rose 1.8 percent in the second quarter, against 1.7 percent in the first.
By that measure the economy did not slow at all. It sat almost exactly where it had been.
Three readings of one quarter now exist. Growth slowed, growth accelerated, or growth held steady.
The ranking also flipped between the quarters. Output ran 0.9 points above income in the first, and income ran 0.7 points above output in the second.
A wedge that changes direction in a single quarter is not a trend in either series. It is noise in the measurement being read as news about the country.
Corporate profits sit on the income side of the ledger. Profits from current production rose 400.9 billion dollars in the second quarter, against 74.4 billion in the first.
Annual revisions are where the two sides get reconciled against fuller tax data. The third estimate for the quarter carries those revisions.
Nothing here says the economy is stronger than reported. It says the reported figure has a twin, and the twin disagreed.
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What reconciles them
Real gross domestic income in the quarterly accounts. The agency publishes it in the same release as the output figure, usually several paragraphs down. A spread that narrows would show the two sides converging, and one that widens would show the measurement problem deepening. (Source: Bureau of Economic Analysis)
Withheld income and employment tax receipts. The Treasury reports these daily, which makes them the fastest independent read on wages actually paid. Receipts running above the income side would favor the higher estimate, and receipts running below would favor the lower one. (Source: Department of the Treasury)
The quarterly census of employment and wages. This covers nearly every employer rather than a sample, and it is the record the income side gets revised against. A revision toward that census would settle which of the two counts held up. (Source: Bureau of Labor Statistics)
Two estimates of one economy are not a cross-check on each other. They are a single measurement with its uncertainty printed twice.
Talk soon,
The Playbook Daily
