In theory, GDP and GDI are supposed to be equal. But a significant gap has developed between these indicators. Will it correct itself or could it be a warning sign?
As we put together our first quarter edition of the Observations in Fixed Income presentation, we noticed the recent and significant separation between gross domestic product (GDP) and gross domestic income (GDI), with GDP growth eclipsing GDI by 2.8 percentage points. GDP and GDI are, in theory, expected to be equal because every dollar spent on goods and services should generate an equivalent dollar of income for the individuals and businesses involved in the production process. This is based on the principle that the value of output should be equal to the income generated from that output.
GDP or GDI: The Two Growth Measures Have Bifurcated, but Which One Is Correct?
Source: Bloomberg
While GDP and GDI are theoretically equal, they do not often diverge. It is not clear why these data series stray at times. Still, these discrepancies are typically relatively minor and are often addressed and refined over time as data quality and measurement techniques improve. Interestingly, these growth measures diverged significantly over the last 15 months. While the natural refinement process could happen again through revised data and other collection improvements, it is possible that the discrepancy between GDP and GDI may be telling us something about the economy.
When GDI underperformed GDP, the income generated by producing goods and services within an economy grew slower or declined compared to the economy’s overall output. Among the possible dynamics and implications for the economy are:
Income distribution: If GDI underperforms GDP, it may suggest that the benefits of economic growth are unevenly distributed across different segments of society. It could indicate that a larger share of the income generated is going to factors of production such as profits, rents, or other forms of capital rather than wages and salaries. This can have implications for income inequality and social welfare, clearly issues the U.S. economy has struggled with for some time.
Productivity and profitability: GDI underperformance relative to GDP may also suggest that output growth is not translating into equivalent income growth, possibly due to narrowing profit margins, rising production costs, or other inefficiencies in the production process. This could signal economic difficulties or structural issues that need attention.
External income flows: If GDI underperforms GDP, it could also suggest that a significant portion of the income generated within the country is flowing out to foreign investors or entities. This may indicate a reliance on foreign-owned production or a trade imbalance that affects income distribution within the domestic economy.
Measurement issues: In most cases, discrepancies between GDP and GDI tie back to data collection errors, differences in estimation methods, or time lags in data availability. Therefore, it’s crucial to carefully analyze the underlying causes of GDI underperformance before drawing definitive conclusions about the state of the economy.
The U.S. economy avoided recession in 2023, but we are concerned that the trajectory in 2024 could be weaker than GDP trends. Although the growing bifurcation between GDP and GDI, with GDI notably weaker, is likely tied to data issues, we cannot rule out the chance that the U.S. economy has less momentum than it seems. This is something we will keep a close eye on over time.
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