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Notes to myself, possibly of interest to others.
-- Bill Northlich

Thursday, March 11, 2010

Focus on income (ie, on employment)

The GDP numbers that the markets have been trained to focus on may be misleading. Look at the charts below. While GDP has to do with spending, there are other accounts in the National Accounts that also focus on income. In the final analysis, income is what drives everything in the economy — it is just a different measure of economic activity.

What is interesting is that as of Q3, Gross Domestic Income was still contracting, albeit fractionally. And the ‘statistical discrepancy’ between it and the spending accounts, at $253 billion (annualized), is without precedence...

the output gap (a positive output gap indicates that GDP is higher than what can be supported by existing labor and capital resources) is so big that the U.S. economy is now nearly 12 million jobs shy of being at full employment — it will take at least five years to get there and in the meantime, expect deflation to remain the primary trend. Income will be king.

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