U.S. GDP Allegedly Up - National Income Down
Nominal GDP growth was upwardly revised from 3.0% to 4.6%. At the same time, as the domestic product deflator was upwardly revised from 1.1% to 1.3% and the domestic purchases deflator was upwardly revised from 4.3% to 4.4%, this means that unadjusted growth was upwardly revised from 1.9% to 3.3%, and adjusted growth from -1.3% to 0.2%.
Yet what seemed to be ignored was that the report also said that corporate profits fell again-and this despite the fact that the BEA definition of profits is unaffected by write-downs. Overall corporate profits fell in nominal terms by an annual rate of 9.2% compared to the previous quarter and by 7% compared to Q2 2007. If you adjust for inflation, then we're talking about double digit declines in corporate profits.
And moreover, this number would have been even more dismal if it hadn't been for the rising profits from the foreign subsidiaries of American companies compared to the profits of the subsidiaries of foreign companies in America. The profits of domestic non-financial companies fell in nominal terms as much as 21.8% at an annual rate compared to the previous quarter and by 17,4% compared to Q2 2007. Adjusted for inflation, these declines are even larger.
The point about that is first of all is that it will likely cause companies to reduce their investments in the future. And the second point about that is that if there really was such a strong boom as the headline GDP figure claims and if profits fell so dramatically, then who is reaping the benefits of this alleged boom? Workers? No. While they at least enjoyed rising nominal income (+3.1%), real compensation of workers fell by 1.2%. Government? No. The budget deficit soared during the second quarter and increased even excluding the effect of the so-called tax rebates.
So, if all sectors -corporations, workers, government- of the American economy suffers from falling real income, then how could real GDP boom by more than 3%? There's something seriously wrong with that picture.
However, this discrepancy is not a mystery. In my post on the previous GDP report, I explained this mystery. First, there is the terms of trade effect, which accounts for almost the entire alleged GDP growth. Secondly, there is the statistical discrepancy effect. National income rose only 2.1% in nominal terms, compared to 4.6% for nominal GDP, despite the fact that factor income from abroad fell this quarter compared to the previous one. This was the fifth quarter in a row that national income increased less (decreased more) than nominal GNP. With inflation during the quarter running at 4.3%, real national income fell by more than 2%.
Some would perhaps argue that I am biased by assuming that the national income measure is more reliable than GDP. After all, this discrepancy could reflect an underestimation of national income as well as an overestimation of GDP. This is true, but given the other indicators available, both in other government reports, in private sector reports and reports of increasing economic discontent, it seems clear that the national income number better reflect economic reality.