(Updated to include quotes from Brent Moulton)
One of the big questions in the economy right now is why job growth has been stronger than economic growth suggests it should be. There are several theories, which Peter Coy and I describe in our recent Bloomberg Businessweek article on President Barack Obama’s stewardship of the economy. The best scenario for the White House (and the country) is that the most popular measure of economic growth—gross domestic product—is actually understating things, and we’re in better shape than we realize.
That theory got a boost yesterday, when the Bureau of Economic Analysis released its revision of an alternative measure—gross domestic income—that indicated the economy grew at a robust pace of 4.4 percent in the fourth quarter last year. That’s much faster than current GDP forecasts, which range from about 2 percent to 2.5 percent. Why the difference? GDP and GDI rely on different factors, so they can vary in the short term. But ultimately they should reflect the same thing. As Bloomberg’s Alex Tanzi explains:
For a given quarter, the estimates of GDP and GDI may differ for a variety of reasons, including the incorporation of largely independent source data. However, over longer time spans, the estimates of GDP and GDI tend to follow similar patterns of change.
There’s disagreement among economists about which is the better measure of growth. But as Morgan Housel of the Motley Fool points out, there’s some strong evidence to suggest GDI provides a better gauge of real-time economic growth. If so, the stronger jobs numbers may be warranted—and may continue, despite worries by Federal Reserve Chairman Ben Bernanke and others that they won’t.
“The numbers [GDP and GDI] do tend to narrow as the data is revised,” says Brent Moulton, associate director for National Economic Accounts at the Bureau of Economic Analysis, “though not as much as perhaps we’d like. One study does say GDP tends to revise toward GDI, and that would suggest that the GDI number is certainly worth paying attention to.”
Further evidence of strengthening came in this morning’s consumer spending number for February, which grew 0.8 percent and outpaced the estimates of most economists. Of course, nothing is certain. But any evidence that the recovery is gaining speed is welcome news.