There has been a significant economic debate this year regarding whether we are experiencing a recession. This debate revolves around the fluctuating GDP, while its lesser-known counterpart, GDI, is indicating a severe downturn. The US government relies on two primary measures of economic growth: GDP, which measures the total value of goods and services produced in a year, and GDI, which measures all the income received in a year. In theory, these two measures should be equal since they represent different sides of the same economic transactions. However, since the pandemic, they have diverged significantly, with GDI lagging behind GDP by approximately $240 billion annually. This discrepancy signifies a substantial amount of lost economic activity. To put it into perspective, $240 billion is equivalent to Ohio’s GDP.
What’s more concerning is that if GDI is the more accurate measure, it implies that economic growth could be overstated by nearly 3%. This has significant implications for the ongoing recession debate, which has been centered around the fluctuations of GDP, occasionally dipping into negative territory. If GDI is indeed the more reliable indicator, it would mean that we have actually been experiencing a contraction for the past 18 months. The last time we witnessed such a prolonged decline was in Q3 of 2008, just before the Lehman Brothers collapse and the subsequent global financial crisis.
It’s important to note that even the GDP numbers themselves are not in great shape. It’s common for GDP to fluctuate between positive and negative during the early stages of a recession. For instance, during the 2008 crisis, which was the most severe since the 1970s, Q1 showed negative growth, followed by a positive bounce in Q2. However, GDP then turned negative and remained so until late 2009. The National Bureau of Economic Research (NBER) officially declared the recession to have started from that initial negative quarter, disregarding the temporary positive bounce.
If we consider that the 2008 recession was declared after just one negative quarter, it’s worth noting that we have already experienced two negative quarters, which has been the standard definition for a recession for almost a century. However, if we delve into the GDP versus GDI discrepancy and favor GDI as the more accurate measure, it would mean that we have already endured six negative quarters without officially entering a recession.
Now, if policymakers and government statisticians, whose salaries we fund, were genuinely aiming to report the truth about the economy and provide necessary guidance to businesses, banks, and households, they would analyze the two negative GDP readings and cross-reference them with the six negative GDI readings (considering their conceptual equivalence). This would raise alarm bells. However, their goal is not to responsibly guide us but to deceive us in the hopes that we will spend our way out of the crisis. This deceptive tactic, known as “forward guidance,” involves attacking anyone deviating from the script and warning Americans to prepare for the impending economic downturn.
The bottom line is that GDP indicates a recession, even considering the pandemic’s uncertainties, based on the hundred-year definition. However, GDI suggests that we have been in a deep recession for an extended period, with stock markets propped up primarily by central bank liquidity. Meanwhile, the government in Washington continues to gaslight Americans into ignoring the approaching calamity until it is too late, at which point they will claim that nobody could have predicted it. We will continue to monitor the situation closely.
Until next time, stay informed and stay vigilant.