NGDP & NGDI: “Take II”

In his post Scott Sumner writes:

Don’t believe the headline 1.4% rise in Q4 NGDP.  The actual rate of increase was 3.6%, or 2.6% in real terms.  You want to always use the NGDI estimate of NGDP, which is more accurate than the NGDP estimate of NGDP.   Of course the job growth in Q4 was consistent with a 2.6% RGDP number, and wildly inconsistent with 0.4% RGDP growth.

I´m not fixated on differences between the two. In the end they have to provide the same information (an accounting identity: Y=E). A while ago I did a tongue in cheek post: NGDP & NGDI: Two sides of the ledger and playing “catch-up”.

One problem with the NGDI measure of NGDP is that it is only released with the final revision (3^rd) of the NGDP measure of NGDP. But even leaving that aside, I think the NGDP measure of NGDP is at least as good as the NGDI measure of NGDP.

I´ll illustrate with a few charts. Scott says that “Of course the job growth in Q4 was consistent with a 2.6% RGDP number, and wildly inconsistent with 0.4% RGDP growth”. Those growth rates are annualized growth rates, so quite volatile. In fact NGDI growth is more volatile than NGDP growth, both on the basis of year on year growth and annualized growth (naturally, the means are the same).

The chart shows annualized employment growth and NGDP and NGDI annualized growth. Note how NGDI growth wiggles about more ‘wildly’ than NGDP growth. Note also how much less volatile is annualized employment growth.

An important point to note is that employment, as is well known, is a lagging indicator. This can most clearly be seen following the trough of the Great Recession. Employment turns 1 quarter after NGDP/NGDI. Therefore, employment growth is more likely to be consistent with spending and real growth in the previous quarter than with contemporaneous growth. And in Q3 NGDP annualized growth was a ‘solid’ 5.9% (4.3% for NGDI).

The next chart narrows the period and shows annualized employment and RGDP growth. The lagging nature of employment stands out. Note that in Q3 2012 RGDP growth clocked 3.1%. Given that it dropped to 0.4% in Q4, maybe employment growth in Q1 2013 will be a little lower than the average of 1.6% obtained in the last couple of years (also the rate observed in Q4 2012).