The U.S. economy may be stronger than it seems. Two important revisions were released this week that shed light on the apparent disconnect between the labor market and the rest of the economy. First, the preliminary benchmark revisions to the jobs report. Then, the second estimate of Q2 GDP growth was released.
These estimates were closely watched by many because, prior to this week, there was a profound disconnect between the establishment employment survey (also known as the monthly jobs report) and the lackluster GDP growth of the U.S. economy. How can the GDP be declining while the labor market is so strong?
One theory for these revisions held that the jobs numbers were overestimated. But, Wednesday’s preliminary benchmark revisions to the jobs series showed that the U.S. economy actually added 462,000 more jobs than was previously recorded. So the theory that the employment gains were overinflated doesn’t hold.
However, included in Thursday’s second estimate of Q2 GDP was Gross Domestic Income (GDI). The two measures, GDI and GDP, should theoretically be equal – one measuring total income and the other total production – but often there are small discrepancies between the two. Lately, the divergence has been huge: reported GDI rose 1.6% in the second quarter, while the revised GDP numbers showed a decrease of 0.6%.
The average of the two, gross domestic output, grew at 0.4% in the second quarter. If we take this measure that corrects for the large difference between the two, the U.S. economy did not shrink at all in the second quarter. In fact, it experienced modest growth. This follows an increase in the first quarter, as gross domestic output grew 0.1%.
Very quickly, recession fears can be dispelled. The U.S. economy has not experienced any decrease in output in 2022, yet. Reconciling a strong labor market with modest economic growth is certainly easier than doing so with a shrinking U.S. economy.
