12/04/23 09:14 AM EST

GDI Contradicting GDP Growth

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

Today’s bonus chart illustrates the Q/Q change in Real Gross Domestic Income. Along with the inverted yield curve normalizing, Real GDI is a reliable recession indicator.

While Real GDP measures the total output of goods and services valued at constant prices, thus adjusted for inflation, Real GDI provides an income perspective, accounting for the total income earned from that production, also adjusted for inflation. In Q3 2023, the discrepancy between these two measures was quite pronounced.

Real GDP saw a significant increase at a 5.2 percent seasonally adjusted annualized rate (SAAR) in the third quarter of 2023, as reported by the Bureau of Economic Analysis (BEA). This figure was revised upward by three-tenths from its initial estimate, reflecting stronger economic activity than initially thought. A key revision was in nonresidential fixed investment, shifting from an initially reported contraction to a growth of 1.3 percent at an annualized rate, showcasing a more robust investment landscape than earlier data suggested.

On the other hand, Real GDI, while theoretically mirroring GDP, depicted a more modest growth at a 1.5 percent annualized rate. This divergence can sometimes signal deeper economic undercurrents that GDP figures alone might not capture. Real GDI's lower growth rate could imply that income, and therefore the economic reality for businesses and individuals, is not as robust as the output data suggests. This divergence warrants attention as Real GDI may offer a closer reflection of the real-time economic environment, considering it encompasses the actual incomes of consumers and businesses.

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