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Gross domestic income appears weak, which can indicate a recession may be near, Goldman Sachs said.
But the data GDI is based on needs revision, the bank noted.
If revised, it would likely show the US economy is growing “above potential.”
Falling gross domestic income can often be a signal that precedes a recession, but this time around, the metric’s decline is likely a statistical illusion, Goldman Sachs wrote in a weekend note.
In the third quarter of 2023, GDI slid 0.1% year-over-year. The decline takes the GDP-to-GDI spread to its highest level in three decades, fueling doubt in how resilient the US economy really is.
Though the two figures focus on different inputs, both gauge economic activity, and should technically reflect one another. Though there’s often some difference between the two, strong divergence can mean that one or the other is misrepresenting economic conditions.
In the third quarter, real GDP stood 2.6% higher than GDI.
But it’s likely that this wide gap will shrink once GDI data is revised, Goldman Sachs analysts led by Jan Hatzius wrote.
“GDI growth has sometimes been weaker just before the economy goes into recession, leading some commentators to place more weight on it as a signal of inflection points in economic growth,” they said. “However, we see some tangible reasons why GDI probably understates growth.”
GDI measures activity through income, wages, interest, and dividends, instead of focusing on expenditures. That includes net interest payments, an often poorly calculated metric, Goldman Sachs said.
Current estimations make it appear interest payments fell 38% since the third quarter of 2022, hitting their lowest level since 2004 in nominal terms. But this is inconsistent with the Federal Reserve’s rate hikes and Treasury bond yields.
But the Bureau of Economic Analysis, which measures GDI, has a history of revising the early metric estimates in the same direction as the feds fund rate.
GDI could also swing higher as corporate profits are likely understated in the measure, as earlier tax changes skewed BEA’s estimations to the downside. Meanwhile, falling capital gains and the inclusion of out-of-date state and local government enterprises in the data are also artificially warping the metric.
“To gauge ‘true’ growth in the four quarters to 2023Q3, we would use the average of GDP (2.9%) and GDI adjusted for our four distortions (1.3%),” Goldman Sachs wrote. “The resulting 2.1% estimate implies that the US economy grew at a pace close to or very slightly above potential.”