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By New_Deal_democrat March 27, 2015 1:55 pm
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Mixed messages from 3 forward-looking aspects of GDP

This morning's final revision to 4th quarter 2014 GDP actually contained 3 pieces of forward-looking data.  One was positive, one negative, and one mixed.

Let's start with the positive:  gross domestic income.  GDI is the opposite side of the accounting ledger from GDP, and it is generally thought that GDP over time resolves in the direction of GDI. In particular note the 2006 and 2007 divergences between GDP and GDI. Today we finally got 4th quarter GDI, and it was +3.0%, higher than GDP:

So that's the good news.

Now the bad news: corporate profits, particularly as deflated by unit labor costs, declined from the 3rd quarter:

Corporate profits deflated by ULC are one of Prof. Geoffrey Moore's 4 long leading indicators, so we do not want to see any sustained decline.

The silver lining here is that proprietors' income is a reasonably close proxy for corporate profits.  They are reported monthly, so they are much more timely than corporate profits reports.  Proprietors' income, deflated by the personal consumption expenditures price index, have turned up in the last several months,  So there is a decent chance that the decline in corporate profits is not the start of a negative trend.

The mixed news is on real private residential investment, a proxy for housing.  Professor Edward Leamer of UCLA has pointed out that this metric, as a percentage of GDP, peaks on average about 5 quarters before any downturn in the economy.

The good news is that real private residential spending, as revised, make a new high in the 4th quarter.  The bad news is that it declined as a share of GDP:

So, even though today's GDP revisions tell us what happened 3 to 6 months ago, they do convey some information about what to expect about 6+ months from now.  The news is mixed, and warrants extra attention to these metrics when they are reported for this quarter.

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