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By New_Deal_democrat February 27, 2015 9:58 am
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Revised Q4 2014 GDP: good news on proprietors' income, mixed on residential investment

The first revision of 4Q 2014 GDP was reported this morning.  Generally it was a "meh," not changing much, although the small decline was mainly due to there being less of an increase in inventories, which is a wash.

But what about the forward-looking indicators? Gross Domestic Product tends to move in the direction of Gross Domestic Income (the other side of the ledger) over time.  But that won't be reported until the second revision next month.  Corporate profits deflated by unit labor costs are a long leading indicator, usually turning one year or more before the economy as a whole, but they also won't be reported until next month.  Big help!

But there are two forward-looking nuggets: proprietors' income deflated by the GDP price index, and a slight revision to real private residential investment.

Proprietors' income grew by over 1% q/q.  As shown in the two graphs below, this (blue, left scale) is almost as good a long leading indicator as corporate profits (red, right scale).

Here is 1959 through in 1984:

Here is 1984 to the present:

Both deflated proprietors' income, and deflated corporate profits turned negative at least a year before every recession with the exception of 1974.  Additionally, proprietors' income did not turn negative before the 2001 recession.  That's 6 of 8 recessions.

So, while deflated proprietors' income is a little less reliable than deflated corporate profits, this is additional confirmation that the economy will continue to grow through the end of 2015.

On one other front, the news was more mixed.  Real private residential investment was revised upward, and as a result made a new high (blue in the graph below).  But, as a share of GDP (red), the favored long leading indicator of Prof. Edward Leamer ( http://www.nber.org/papers/w13428 ), it remains below its Q3 2013 peak:

This broadly means that the economy is carrying housing, rather than housing carrying the economy. Typically Leamer's measure has peaked 5 quarters before a recession - which is now. Since, due to lower interest rates, I expect housing to pick up in the months ahead, I believe Leamer's measure will make a new high. If it doesn't that would be a cause for concern. But in the past it has declined more before the onset of a recession, and with all the other long leading indicators positive, I remain positive as well.

Replies: Revised Q4 2014 GDP: good news on proprietors' income, mixed on residential investment

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    MMM's picture
    MMM Posts: 1

    Thanks. Why do you use corporate profits without IVA & CCadj?

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