One confusing thing about the GDP numbers is that there are “expenditure” numbers and there are “income” numbers. Their totals should be equal conceptionally, but they should be analyzed separately, which many commentators don’t do. It is typical to hear one comment on consumer spending, investment spending, and profits as if they are all part of what you add up to get the GDP total. Consumption and investment are part of the expenditure stream while profits are part of the income stream. It is helpful to know the income components of GDP as well as the more familiar spending components.
To understand the national income accounts, keep in mind that total spending equals total income in a generic theoretical sense. When some of us spend money on newly produced output, others of us earn income on that spending. One person’s spending is another person’s income, as they say, and are equal in value.
The spending categories are familiar: consumption spending, plus investment spending, plus government spending, plus exports, minus imports, equals GDP. These categories originated with Keynes and have been adopted by most of the statistical agencies of the world. One source of confusion is the subtraction of imports. Imports are subtracted because they were not netted out of the other categories of spending; so, subtracting them from the total is the easiest way to avoid an over-estimate of spending that generates domestic income. Unfortunately, the minus sign before imports makes many people think of imports negatively. That should not be since imports are the benefits from trade and exports are the cost.
Conceptually, spending from the various categories generates an equal amount of income, which we divide into separate categories also. The shorthand way we learned to say them in school is wages, interest, rents, and profits. In a perfect world, you could get your GDP total from adding up these categories of income rather than the more familiar categories of spending. Since the world is not perfect, while the principle remains intact, there are a few accounting glitches along the way that muddy the waters a bit. They add up to disposable personal income, and then other adjustments are needed to take you the rest of the way to total GDP.
The Bureau of Economic Analysis, in its GDP report yesterday, had this to say about gross domestic income:
“Real gross domestic income (GDI), which measures the output of the economy as the costs incurred and the income earned in the production of GDP, increased 1.7 percent in the third quarter, in contrast to a decrease of 0.7 (revised) percent in the second. For a given quarter, the estimates of GDP and GDI may differ for a variety of reasons, including the incorporation of largely independent source data. However, over the longer time spans, the estimates of GDP and GDI tend to follow similar patterns of change.”
Note that real gross domestic income increased only 1.7 percent in the third quarter (second estimate) compared to 2.7 percent growth in real gross domestic product. The income numbers are released on a monthly basis rather than quarterly. We learned today, from a separate report on personal income, that, in October, the first month of the fourth quarter, personal income and disposable personal income both increased by less that 0.1 percent. This is not an auspicious beginning of the fourth quarter.
In my previous post on the GDP revisions, I discussed some of the spending components of GDP; here, I will briefly comment on some of the income components.
Wages (employee compensation plus proprietors’ income adjusted for various things) totaled $9,774 billion (annual rate) in the third quarter, up modestly from the second quarter. However, there was a slight decline from September to October, the first month of the fourth quarter.
Rental income (with adjustments, of course) was $471 billion in the third quarter, up from the second quarter, and up again from September to October.
Personal income receipts on assets was $1.7 trillion in the third quarter, and increased from September to October.
Corporate profits (with adjustments) totaled almost $2 trillion in the third quarter, and were up $67.3 billion from the second quarter.
Personal interest income was $976.9 billion, up slightly from the second quarter. In October, interest income rose over its September level.
Personal dividend income was $736 billion, up slightly from the second quarter. In October, dividend income rose slightly further.
Personal current transfer receipts (from government) were $2,387.9 billion.
A rough total of all this gives disposal personal income of $11,929 billion, to which you add personal taxes to reach total personal income of $13,398.4 billion. Personal income rose only a tiny amount from September to October.
The October numbers we have for the income components of GDP suggests that the fourth quarter GDP will likely not be as strong as the third quarter.