Ed Dolan's Econ Blog

U.S. Domestic Income Grows Strongly in Q4 2011, Outpacing Growth of GDP

According to the final figures released this week by the Bureau of Economic Analysis, U.S. Gross Domestic Income grew at a strong 4.4 percent annual rate in Q4 2011. Growth of GDI outpaced that of GDP, which was unrevised at 3 percent, itself the strongest of the year. As the chart shows, it was the second consecutive quarter that GDI had grown faster than GDP.

In theory, gross domestic product and gross domestic income are equal. Every act of production must, by definition, generate income for someone in the form of wages, rents, interest, or profits. In practice, the BEA measures the two using two different data sets. It calculates GDP as the sum of expenditures on consumption, investment, government purchases, and net exports. GDI is the sum of observations of compensation of employees, proprietors income, corporate profits, and other income items. Not surprisingly, the two do not match, partly because of differences in methods and partly because of errors and omissions.  The BEA calls the difference between GDI and GDP the statistical discrepancy. It was unusually large in Q4 2011.

Does the difference in GDI and GDP growth have any real significance, or is it a mere statistical quirk? Some optimists think that the stronger growth of GDI over recent quarters shows that GDP is understating the true pace of economic activity. If so, it would help explain why the job market is performing more strongly than the GDP data would suggest. For example, as I detailed in this recent post,  the employment gap is closing significantly faster than the output gap. Next month’s jobs data and the preliminary income and product reports for Q1 2012 should provide some indication as to the validity of this hypothesis.

There were not many other surprises in the BEA’s final report for Q4 2012. One small change was a downward revision of nominal GDP growth from 3.9 percent to 3.8 percent. That news would come as a disappointment to NGDP targeters, who would like to see growth of 4.3 to 5 percent in the long run. In view of the still-substantial output gap, it would be desirable to see NGDP growing even faster than that at present. Those who share this line of thought will continue to push for more expansionary monetary and fiscal policies.

Follow this link to view or download a brief slideshow with charts of Q4 national income and product data.

6 Responses to “U.S. Domestic Income Grows Strongly in Q4 2011, Outpacing Growth of GDP”

LCRApril 1st, 2012 at 5:25 pm

Does the GDI include capital gains? Because of course there was a lot of stocks sold on the quarter. Also, the distribution of GDI is unknown right? Did 90% of it go to the 1%

Ed Dolan EdDolanApril 1st, 2012 at 7:46 pm

The methodology of the national income accounts is not my specialty, but I believe I am correct in saying that it does not include capital gains. The top 1 percent of earners receive about 21 percent of individual income, so that would be a little less than 20 percent of GDI. Inequality is definitely increasing, but not to the point that you suggest. The top 1 percent "only' get about 20 times more than their fair share.

LCRApril 1st, 2012 at 9:42 pm

"The top 1 percent "only' get about 20 times more than their fair share"

If you include income from capital gains and dividends, the number is likely much higher. There is tremendous skew towards the "wealthy". By the way, our economy is debt driven so all of this is somewhat nonsensical. As soon as the state and federal governments tax the hell out us and rescind on their obligations, our "true" GDP will show. Without the governements' budget deficits, we have a crap economy.

R. CoutinhoApril 2nd, 2012 at 12:45 am

The federal government's deficit is equal to the amount that the private sector (plus foreign counter parties) gain in savings. It has to be. That is how net money is created. There is no other way for that to happen.

Ideally, during a strong economy the deficit will be lower (we don't need as much money put into the system since those who want to be employed are, in fact, employed). In a weak economy there is, by definition, too little money out there to hire all the people who want to work. Thus, deficit spending (by the entity that creates the money) is warranted because we have too little money to spend in the private sector.

LCRApril 2nd, 2012 at 9:55 am

That is not true. Money does not need to be created by the Fed to support non-productive economy. It has to be withheld to that these areas disappear. Money has to be allocated appropriately to where it is best used in the economy, it needs to go into production. The fact that 12% of GDP is nothing more than pushing paper within financial institutions and about 10% is spent on heathcare (dying senior who by and large are not producing), you will continue to see deficit spending ad infinatum.

barfApril 2nd, 2012 at 7:35 am

we do have a "crap economy." i agree with that. "could be crappier" as well. "the long hard slog" as Defense Secretary Rumsfeld put it. The deficit is proof of what you say: catastrophic failure. Moreover the Supreme Court will strike down "the mandate approach" to tax policy. Very interesting to note: while the 1% sprint ahead State and local governments our downsizing. Should not come as a surprise. This is "bailout economics" 101. "Bailing out the wealthy at the expense of the State." Now programs…including "war programs"…will be cut. Thankfully…there has been a lot of push-back–interestingly from Republicans themselves.