Axios Macro

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What a week. The Fed will likely announce a 0.75 percentage point interest rate hike at 2pm EDT today, with chair Jerome Powell taking questions from the media at 2:30. Tomorrow morning at 8:30, second-quarter GDP numbers will either end the recession debate or amplify it.

📈 Late-breaking intrigue: New durable goods and trade numbers out this morning are causing forecasters to revise up their GDP projections. This could be enough to push up Q2 growth and make all this recession chatter meaningless ... for now.

  • Today, we dive into conflicting signals from two key economic measures, and energy supply moves.

Edited by Javier E. David, this edition is 664 words, a 2½-minute read.

1 big thing: The economy's diverging gauges

Data: Commerce Department; Chart: Axios Visuals
Data: Commerce Department; Chart: Axios Visuals

As if the economy wasn't already confusing enough, an unprecedented gap between two crucial yardsticks of growth tells a different story.

  • Gross domestic product gets the most headlines and currently says the economy shrank in the first three months of the year. The other, gross domestic income (GDI), says the economy actually grew.

Why it matters: The problem will come to a head tomorrow, especially if GDP does turn out to show contraction for a second straight quarter.

  • That will heighten the recession debate. But with gangbuster job creation, economists aren't even sure if the activity was as weak as first-quarter data suggests.

How it works: GDP adds up all spending in the economy. Yet the GDI gauge sums up income — wages, business profits, or interest payments — as the name suggests.

  • In theory, the measures should be equal. What one person spends is another person's income, after all. But in practice, the different data sources mean they can diverge or even be at odds with each other. Right now, the gap has never been wider.
  • "GDI squares better with some parts of activity that we know. It's hard to understand how we could be adding close to 400,000 people each month on payrolls and then not [be] producing stuff," says Vincent Reinhart, chief economist at Dreyfus and Mellon.

By the numbers: Real (inflation-adjusted) GDI has outpaced that of GDP since the end of 2020. On an annualized basis, the divergence hit a record $676 billion.

  • The end result is two pictures of the economy's health: GDI rose at a 1.8% annualized pace, while GDP fell at a 1.6% annualized pace.

Future revisions, which continue years after the data is first released, may eventually bring the two gauges more in step. For now, the Biden administration expects the divergence to continue.

  • "This year's first quarter growth was likely favorable when looking at income, employment and overall production. Looking forward, initial reads on the income data suggest this growth continued into the second quarter," Treasury Department officials wrote this week

So which measure should get more weight? The unsatisfying answer is both. Economists — including the official arbiters of a recession — like to look at an average of the two.

  • Research by former Fed economist Jeremy Nalewaik found that since the 1990s, initial GDI growth estimates tend to predict eventual revisions to GDP.

What's next: Perhaps the most appealing feature of GDP is timeliness. A read on how the economy fared during Q2 — the first estimate, anyway — is due tomorrow.

  • But its sister metric GDI won't be released until the end of next month.

2. Biden's quiet but important oil move

Oil rigs in Texas
Oil rigs in Midlands, Texas. Photo: Sergio Flores/Bloomberg via Getty Images

It sounds like an obscure, technical step involving the management of America's oil reserve. But an action announced by the Biden administration yesterday could have lasting significance for energy supplies.

Driving the news: The White House announced a plan in which the Energy Department could enter contracts to replenish the Strategic Petroleum Reserve in the future, at prices set today.

Why it matters: Energy companies have been reluctant to invest in more production despite today's sky-high oil prices because they think prices will come down in the future. The new policy is a gambit to use executive authority to increase energy supply, but holding prices down today.

The details: The SPR exists to allow the government to temporarily bring extra oil to market when supplies are short — an action the Biden administration took this spring following the Ukraine invasion. But traditionally, the government has replenished the reserve at whatever prices were at the time of purchase.

  • The Energy Department proposed rules this week that would allow it to enter long-term contracts to restock at a price fixed in advance.

What they're saying: "Fixed-price contracts can give producers the assurance to make investments today," the White House said in a fact sheet. If finalized, it "would encourage near-term production, promote market stability, and put the federal government in a better position to respond to future market volatility."