Friday, July 29, 2011

Recession Confirmed To Have Been Even Deeper Than Many Thought

Theoretically, GDP should always be equal to GDI (Gross Domestic Income), just as Net National Product should be equal to National Income. Because the production and income numbers come from different sources they are however in practice often different. Since there is only one reality, at least one of these numbers must be wrong. So the question is which one of them is true, or at least closest to the truth.

I recently pointed to one article that made the case that income numbers are more reliable, as revisions tend to adjust the production numbers to the income numbers.

This was confirmed in today's annual revision of production and income numbers. in the years of 2007 to 2010 (and Q1 2011). National income was for the period as a whole almost unrevised (the nominal amount was marginally revised up, the real amount was marginally revised down as inflation was revised up), but there was a significant downward revision of GDP particularly in real terms but also in nominal terms. Because of this, the statistical discrepancy between production and income numbers was eliminated almost completely.

As a result, the current GDP and GDI numbers shows that the 2007-09 recession was much deeper than the initial GDP numbers suggested and was instead basically as deep (actually slightly deeper) than the initial GDI numbers suggested. It also means that the recovery since has been even weaker than initially estimated.

The numbers for the first half of this years also shows that this weak recovery has become even weaker, indeed stalling completely after adjusting for terms of trade.


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