Forget About GDP: This Wrongly Ignored Indicator Says The Economy’s Already In A Recession

Forget About GDP: This Wrongly Ignored Indicator Says The Economy’s Already In A Recession
Stéphane Renevier, CFA

6 months ago1 min

When we want to measure the health of a country’s economy, we tend to swoon over one swaggering, haughty figure: Gross Domestic Product (GDP). See, GDP tells us everything we need to know about a country’s output, from your neighborhood's homemade pies to government spending, investments, and net exports.

Meanwhile, we tend to overlook the more brooding, humble stat of Gross Domestic Income (GDI). It tracks the same thing, the overall economic activity of a country – but unlike GDP, GDI provides a low-down on income. Imagine it as the silent workhorse, meticulously keeping track of all the wages, profit, and taxes that a country’s economy rakes in.

In theory, they should be equal – every dollar spent goes into someone else's hands, after all. And even when you throw in some statistical and measurement quirks and differences, the two generally stay pretty in sync. But not lately: while price-adjusted GDP has held surprisingly strong, GDI is practically freefalling. And sorry guys, but that’s not reassuring. GDI has historically been better at anticipating cyclical changes, indicating several past recessions (including 2008) before GDP did. That’s why many economic boffins, including those tasked with setting the official recession timelines, prefer to check the average of both indicators.

And right now, there’s plenty to watch. GDI has fallen so far that it's pulled the average of the two measures into two consecutive quarters of shrinkage, suggesting we might already be in a recession. That’s not enough to justify ringing the alarm bells, but you should pay attention: that’s nudging up the risk of downwardly revised estimates for GDP, and a broader economic slowdown.

Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Learn More

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG