GDP Zigs while GDI Zags

Michael Normyle – Nasdaq’s US Economist joins IBKR’s Jeff Praissman to discuss GDP and GDI and how they are used to gauge the economy.

Email:  Michael.Normyle@nasdaq.com

Web:   www.nasdaq.com

Note: Any performance figures mentioned in this podcast are as of the date of recording (September 18, 2023).

Summary – IBKR Podcasts Ep. 105

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman

Hi everyone, welcome to IBKR Podcasts. I’m your host, Jeff Praissman. It’s my pleasure to welcome back to the IBKR Podcast studio, Michael Normyle, Nasdaq US Economist. Welcome, Michael. Thank you for joining us.

Michael Normyle

Thanks for having me. Glad to be back.

Jeff Praissman

So today we’re going to go discuss GDP and GDI and, you know, I think most people have heard the term gross domestic product or GDP in the news a lot. But you know, another important measurement, the gross domestic income or GDI. Could you explain to our listeners what both the GDP and GDI are to our listen? And what they measure?

Michael Normyle

Sure. So in a sense, it’s pretty simple. They’re both measures of output for the US economy. They just take two different approaches to it. So, GDP measures the market value of what we produce, this is called the “expenditure approach”, while GDI measures what’s earned and producing it, whether that’s wages or interest or profit. So in theory, they should be exactly the same because every dollar spent is a dollar of income for someone else, but there’s always a statistical discrepancy. Usually it’s pretty small, and that’s because of methodological differences like using different data sources and collecting data at different times of the quarter.

Jeff Praissman

So how have GDP and GDI performed over the past 12 months?

Michael Normyle

Well, you know how I said it usually has a small statistical discrepancy? So, Q2 of this year is actually the biggest gap between the two measures in their 75-year history. So many of the listeners, like you said are probably aware of real GDP growth, it’s been pretty strong. It’s up to 2.5% in Q2 and that’s the highest it’s been in five quarters. GDI, on the other hand, it’s at negative 0.5 and it’s been negative for three straight quarters. So GDI is painting a much weaker picture of the economy than GDP.

Jeff Praissman

So, from what you said before, this is certainly not normal that they diverged in performance. Has this happened within recent time that you know of? Or just really sort of we’re kind of in a brave new world right now with these two indicators diverging.

Michael Normyle

So historically they do tend to be very close on average. The difference between GDP and GDI historically, it’s -0.01 percentage points. So essentially 0. That’s mostly because sometimes GDI is higher, sometimes GDP is higher, so it kind of cancels out over time. But 80% of the time of their kind of 75-year history that we’re talking about, they’re within ±1 percentage point of each other. So, this is like you said, a bit of an outlier that we’re experiencing now.

Jeff Praissman

What do you think the difference in performance between the two could possibly mean for the economy?

Michael Normyle

I think it calls into question the strength of the economy a little that we’re seeing. Is it as strong as GDP says it is or is it stagnating or even contracting like GDI says? That’s the kind of gap that we see here. That’s why it’s often best in practice to take the average of the two, which is called gross domestic output. And so if you do that, the economy is seeing low but positive growth. Which you know might be a better read than just looking at GDI or just looking at GDP by themselves.

Jeff Praissman

And I want to kind of, you know, take a step back and maybe a little bit more of a paint picture for the for the listener and the different government agencies that sort of look at this data, and one of those is the, you know, the Bureau of Economic Analysis or the BEA. What function do they perform and how do they use the data, you know, coming from the GDP and the GDI and even other sources to help people understand the US economy?

Michael Normyle

Well, I mean, as an economist, I’d say they’re very important. The BEA, along with the Bureau of Labor Statistics and Census Bureau, they’re some of the key federal agencies that collect and distribute statistics on the state of the US economy. And so, the data they provide, it gives people the hard data necessary to understand the economy and make decisions whether that’s as a business or an investor or an individual. And then of course, it’s also helpful for the Fed to guide monetary policy.

Jeff Praissman

You had mentioned earlier that the reason that there’s usually some, you know, small differences between GDP and GDI is just sort of the timing of the data being collected and maybe slightly different data points. The data used for both of them, is it ever been revised and if so like what are some of the reasons that they would revise the numbers?

Michael Normyle

So in fact, it’s constantly getting revised. So, the first print of GDP that we get is called the advance estimate and then it’s followed a month later by the preliminary estimate, and then a month after that by the “final estimate” except the final estimate isn’t actually final, it gets revised for years after the fact. So, at the end of September, the BEA is doing their benchmark update and it’s going to be revising GDP from 2017 to 2022. So, you know, we’re looking back as far as six years at this point with GDP getting our bias. And so, part of the reason for revisions is some of the data being used on the initial releases, it’s based on partial or estimated data. So as that underlying data is more fully available then revisions are made, but there are also methodological improvements that are integrated on occasion, and one such methodological improvement — It’s pretty relevant right now — and that’s because the BEA is going to start counting interest paid by Federal Reserve banks toward GDI.

Jeff Praissman

So, in the past that just wasn’t figured into the calculation? It wasn’t a mistake., it was just they just didn’t incorporate it into the calculation for GDI and now that they’ve realized that they should. Is that a correct statement?

Michael Normyle

Yeah, exactly. The Fed has only started paying interest on the reserves that were held there since 2008 but of course, as everyone knows, a lot of that time period, rates were basically zero or close to 0. So it wasn’t a lot of money but now with the Fed funds rate, you know in the 5 ¼ – 5 ½ percent range, then it’s starting to add up.

Jeff Praissman

So what effect will adding the net interest payments into the GDI have on the revised number and do you think adding them in provides a better picture or is it just more of a manipulation of like the numbers?

Michael Normyle

It’s going to be pretty significant, so current estimates suggest this change alone should shrink the gap between GDP and GDI by almost half. So, as I mentioned, the Fed, they pay interest on deposits that banks keep with the Fed. And so now, with Fed funds rate up, this has gotten pretty significant and they’re now paying more interest than they’re receiving on their assets. So, their net interest payments are estimated at well over $200 billion at this point. I don’t think it’s anything nefarious going on. It’s actually making the BEA’s treatment of the Fed more consistent with how they treat other financial corporations. And since the Fed’s only been able to pay interest since 2008 and a lot of those years didn’t really add up to much. It wasn’t a big issue that it wasn’t counted, but now that it’s getting to be a pretty significant, significant amount of money, then it’s going to start getting us a more accurate picture of the economy.

Jeff Praissman

Got it, so it’s a positive thing that they’re adding it in and making the GDI more of a reflection of the actual economy versus prior to it, when rates were, you know, — either the Fed wasn’t paying interest or the rates were super low,  it didn’t really matter either way.  But obviously the last year or so it’s been pretty significant changes as far as the economy,

Michael Normyle

Yeah, exactly.

Jeff Praissman

How do you think that, you know, GDP and GDI will perform over the next 12 months?

Michael Normyle

Well, I think we’re heading into a bit of a weaker period here in the next couple of quarters. I mean for one, of course, we had student loan payments beginning again with the COVID era break that people had coming to an end in October. And then, we of course have potentially a government shutdown ahead of us here. And then now with the UAW being added to the list of industries that have seen work stoppages. So all these you know, the severity of them, it’s unknown at this point. So that is something that could be a big deal, could not be as much of a big deal, depending on how the government shutdown is resolved or the work stoppages. But beyond that of course, we’re coming up on about a year lag from when the Fed was pushing through at 75 basis point rate hikes last summer and fall. And so that’s getting to the point where those lagged effects of those hikes are reaching kind of their peak impact and so as we get into next spring and summer, the impact of those hikes will start to fade, and we’ll probably start seeing some rate cuts. So, both of those should add a little tailwind to the economy, but I’d expect growth to be relatively slow even then, so. I think in short, kind of getting into a bit of a weaker period immediately ahead of us here but picking up after that in the back half of that 12-month period.

Jeff Praissman

Overall, if we’re talking this time next year, you kind of expect it to be a little bit more of a positive impact to the later of the next 12 months.

Michael Normyle

Yeah, exactly.

Jeff Praissman

Before we let you go, do you have any other thoughts on GDP and GDI?

Michael Normyle

Well, I think for anyone interested in following the economy, GDI shouldn’t be overlooked. It’s worth keeping an eye on it but since it comes out a month after we get GDP for each quarter, it doesn’t get quite as much attention except for a little bit right now with the historically large gap between the two. But in general, I think it’s an important indicator to watch, the NBER looks at it when they’re dating recessions in the US too, so, it’s definitely a useful indicator to watch to get a gauge of how the economy is doing.

Jeff Praissman

This was great, Michael, thank you for coming by. For anyone interested in in more material from Michael Normyle and Nasdaq, you can see our previous podcasts on our website. Just go to under Education and click on Podcasts and you can view previous podcasts from Nasdaq as well as any of our other contributors. I want to remind everyone that you can find all of our podcasts on our website also on YouTube, Spotify, Apple Music, Amazon Music, Pod Bean, Google Podcasts, and Audible. Thank you for listening, until next time, I’m Jeff Praissman with Interactive Brokers.