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You follow Economic Outlook – edit
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This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here
I have been thinking about this a lot lately.
We have loads and loads of incoming U.S. macroeconomic data, news headlines blaring and economists galore.
Still, there seems to be no basic, formal, logical framework available — to everyday businesspeople and investors.
In this very brief piece, I will provide you with two inputs. To lift this fog of confusion.
First, I share the basic logical macro ideas, in equation form. Those that help to build key insights and help to visualize THIS post-COVID U.S. economy.
Along with this, I provide the Internet data portal to go to, down the road.
To update yourselves, on these U.S. macro dynamics.
I also show you my read, on the status of THIS U.S. economy’s dynamics.
I. Basics of Macroeconomic Accounting
Economists can formally capture, and study, dynamic movement in the massive machine of an aggregate economy. At the most basic level, this is accomplished by using this easy identity:
Income = Production
To wit, an entire economy’s income must be equal to its’ entire production. This first gets accounted for, by collecting data on income, into Gross Domestic Income (GDI).
This U.S. income can then be used to buy (spend). Income can buy Gross Domestic Production (GDP) plus added net trade production, Net Exports (Imports – Exports).
Beyond this, there is a plethora of accounting breakdowns — to capture other dynamics going on within the GDP of a given country.
The most common approach is called the expenditure approach.
In this approach, GDI = GDP sub-divides to components labelled household consumption (C), household and business investment (I), government purchases (G) and net exports (NX).
So, to keep on top of U.S. macro matters, where can we find this data?
II. Useful Online U.S. Macro Update Tools
A great tool to stay on top of macro trends, aka aggregate forces, playing out inside the U.S. economy, is freely available.
Comprehensive data is found on the Internet. In a MACRO-SNAPSHOT portal constructed by the St. Louis Fed.
Click thru to the GDP and its components page. Here, you can find useful charts I provide in the full PDF.
III. Income MUST Equal Production
In a first chart I show you, the U.S. Real Gross Domestic Income (GDI) data runs over the last 10 years. “Real” means the macro level data has removed the effects of changes in overall prices. So, we can just look at movement in volumes.
In most discussions on the U.S. economy, or any economy for that matter, the GDI is never the typical entry point. This causes cognitive problems, with understanding what is going on. Particularly, in the aftermath of any COVID shutdown pandemic.
In other words, U.S. income exceeded the pre-COVID trend in 2022, after a vaccination campaign. That is where the start of our price ‘overheating’ problems began to form.
Now, let’s turn to U.S. Real Gross Domestic Production (GDP). This is the traditional accounting data you hear reported in major business headlines, quarter after quarter.
U.S. real GDP has not recovered to its pre-COVID trend.
This is the total opposite narrative from real GDI story. In short, U.S. real incomes are running hot, above the pre-COVID trend. Meanwhile, U.S. real domestic production is running well below the pre-COVID trend.
To reconcile the differences — between the above trend income with the below trend domestic production — we need to move to accounting data that offers deeper insights.
In sum, national income is the sum-total of income earned by the people of a country allocated by their market decisions. This reflects their contribution to the production processes of both domestic and foreign entities.
Income not only includes income earned within the domestic territory of a country. But also, any income earned abroad (never dominant in a recent U.S. context).
On we go!
IV. “Open Economy” Accounting
Another expression of GDP is the national income identity for an “open economy.”
Y = GDP + NX
This is where foreign trade gets incorporated.
GDP = Domestic spending (C + I + G) + Net foreign spending (NX)
NX = Net exports are the difference between exports and imports. It is the difference between the value of goods and services exported to the rest of the world, and the value of goods and services imported from the rest of the world.
If NX is a positive accounting number, it represents the excess (aka “net”) exports purchased by foreigners on U.S. domestically-produced goods and services.
However, this has never been the case for the USA over the last decade. U.S. NX data have always trended to the negative, and the U.S. trade deficits grow more dramatic.
That is because producing foreign goods (the bulk of imports) and services abroad is where domestic income can be spent most wisely. That is, goods priced more cheaply.
The dominant example is the import of cheap manufactured goods from Mainland China. These goods come thru our LA/Long Beach port system (and the other ports), and then enter U.S. retail consumption distribution channels
If imported goods arriving from abroad are not deducted, U.S. GDI (our income) would not be able to balance with U.S. GDP (solely our domestic production).
In short, in a post-COVID world, the income-production gap accounted for by NX has continued to widen and widen.
Ironically, while passenger travel shutdowns, the Russia-Ukraine war, and Chinese COVID shutdowns and tensions make the trend of globalization of goods and services spending and production feel less needed, the total opposite has been the actual case.
The U.S. consumer has never been more dependent on global goods production, than now. This is one subtext we don’t read enough about, in this post-COVID shutdown era.
As U.S. income ran hot, spending pressure got put onto importing goods from abroad.
However, U.S. exporting, much like U.S. GDP, did not recover its pre-COVID trend.
This imbalance morphed into the port and global supply chain headlines you read about in business news. Those huge U.S. port backlogs have now abated.
IV. U.S. Consumption Spending
C = Consumption spending refers to household expenditure on goods and services.
Goods are of three types: non-durables (such as food and cloth), durables (such as cars and refrigerators) and services (such as haircuts, education and medical care).
What is the status update here?
U.S. Services spending is now running above its pre-COVID level. But it has not gotten back to its pre-COVID trend.
U.S. Nondurable Goods spending is trending well above its pre-COVID trend. But this spending growth appears to flatten in the more recent quarters.
U.S. Durable Goods spending is also trending well above its pre-COVID trend. But this spending growth appears to flatten in the more recent quarters, too.
V. U.S. Investment Spending
I = Investment spending refers to capital goods (structures and equipment), which are purchased for producing mainly consumer goods in the economy (although, in reality, machines are also used to make machines).
It may be noted, at the outset, that investment does not include purchases of shares and bonds, which just reallocate existing assets among different individuals. Investment refers to expenditure on new capital, which can be used in the future.
VI. U.S. Government Spending
G = Government purchases account for the various goods and services purchased by the central, state and local governments (like municipalities) such as food, books, stationery, autos and medicines as also services of government workers.
For example, when an individual is working for a nationalized entity, the government is buying his service by paying him a salary. Think mostly on military/defense spending.
Government purchases do not include transfer payments made to individuals, such as pensions, interest on government bonds, unemployment benefit, etc. Those who receive such transfer payments do not provide anything to the government in exchange.
This Government Spending component has been trending down too. Think harder about teacher shortages after COVID school shutdowns. These amounts will clearly exceed any added U.S. defense spending on Ukraine’s defense.
I said I would keep it brief.
That’s for the Zacks SEPT special section.
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