Did the economy actually shrink in the first half of 2022?

The answer is probably not.

Everyone knows that we’ve had two consecutive quarters of negative GDP growth but could the GDP numbers be wrong. It sounds like a silly conspiratorial question but it’s actually an entirely necessary one because there’s more than one way to take measure of economic output.

Enter Gross Domestic Income: GDI is measured as of all the income an economy produces for each quarter. This number should produce the exact same results as GDP and any difference is just a statistical discrepancy/data collection error. Since all money that is spent ends up somewhere GDP, a measure of what is spent should equal GDI a measure of all income but that has not been the case for the first two quarters of 2022.

Q1 GDP growth: -1.6%
Q2 GDP growth: -0.6%

Q1 GDI growth: 1.8%
Q2 GDI growth: 1.4%

This is one of the largest divergences ever recorded.

These results paint very different pictures of the same economy. GDI says the economy continues to grow albeit slowly and that the Fed can continue to hike rates aggressively whereas GDP says we’re already in a technical recession.

I’m more inclined to believe that GDI is closer to the truth given that corporate profits hit all time highs and unemployment is back at its lowest in 50 years. Q2 corporate profits exceeded 3 trillion for the first time and were more than 11% higher than in Q4 of 2021. The economy also added 3.3 million jobs for an average of 470k per month so far this year.

But even if you reasonably believed the answer was somewhere in the middle, an average of the two numbers would produce a positive growth rate in each of the first two quarters.

Averaged growth rate: Q1 0.1%, Q2 0.6%

Some Fed economists have even argued that GDI may be a better measure as this was clearly the case during the Great Recession where initial GDP estimates ended up being far off later estimates.

https://www.stlouisfed.org/on-the-economy/2016/march/better-measurement-output-gdp-gdi

All this to mean that if the National Bureau of Economic Research does declare a recession at some point in the next year or so I’d bet that the start date would not be in the first 7 months of 2022 and that the Fed can still hike rates a lot more.

Overall: Bearish, the economic pain hasn’t even started yet.