What are two common measures of economic growth telling us about the health of the economy?

Gross domestic product (GDP) and gross domestic income (GDI) are two very broad metrics used to assess the state of health for the U.S. economy. The former, and more commonly referenced, indicator measures the total value of goods and services produced. The latter measures aggregate income received across all sectors of the economy, including wages, corporate profits, and tax receipts. In theory, GDI should equal GDP over time, but differing source data and the timing of that data can result in periodic differences. While those are typically minimal, the rather wide gap today paints a somewhat conflicted picture of the current state of the economy.

Although year-on-year GDP has slowed considerably in the past few years, it remains solidly positive. Conversely, trailing 12-month GDI has now contracted for two consecutive quarters. On one hand, the decline in GDI implies that the current expansion’s foundation is showing cracks under a slowdown in corporate profit levels and cooling wage growth, which would be indicative of a hard(er) economic landing. On the other hand, positive GDP growth suggests a level of consumer spending resiliency and underlying momentum that gives credence to the soft-landing script. That scenario has recently benefited from upward revisions in Q1 consumption data.

What’s the bottom line? The divergence between GDP and GDI suggests an increased reliance on borrowing and savings depletion to fuel growth. This is typical of late business cycle behavior that often aligns with weaker job creation and slowing wage growth. Unfortunately, there are limits to how long these factors can continue. The wide divergence that exists today between the two will eventually be resolved. The question is whether GDI bounces back into positive territory first or GDP turns negative.