Between pending Christmas orders, continued strong demand and improving product flow from around the world, goods have been pouring into the United States in the first three months of this year to a record $3.4 trillion per year. rhythm. It was good news, proof that American consumers felt comfortable enough to spend and that global supply chains were recovering after several months of pandemic disarray. But it also caused one of the biggest impacts imports have ever had on the gross domestic product of the United States, making the country’s economy appear to be in trouble rather than the world returning to normal. In the calculation of gross domestic product, that is, the sum of final goods and services created by American businesses and workers, imports are subtracted from the net result – and from January to March, that was enough to push the United States in the red with an annualized growth rate of -1.6pc. That figure, driven at least in part by the vagaries of a still unpredictable supply chain, now features in a politically sensitive debate over whether the US economy is on the brink of recession. When GDP for the April-June period is released next week, it could be negative again, and as a rule of thumb, two quarters of negative GDP growth would mean the US is already in recession. This remains far from the case by the more formal standards used by economists, particularly because hiring, perhaps the most important touchstone, remains strong. A recent Reuters poll showed economists raising the likelihood of a slowdown over the next year to 40pc, but until workers start being laid off, a slowdown is unlikely to have begun. This will raise the question, however, of what GDP says about the health of the economy and whether alternative measures, notably the related concept of gross domestic income, might better reflect what is happening now. GDP grew out of efforts during the Great Depression to find a systematic way to measure the US economy. At a high level, it is meant to show whether firms and workers produced more in a three-month period than they did in the previous three months. Usually expressed as an annual growth rate, it is one of the main benchmarks politicians and investors refer to reflect the overall strength or weakness of the economy. But it is also an accounting identity that simply adds up different compartments, in particular the amounts spent by individuals and the government on final goods and services, the amounts invested by the government and businesses, and the balance of exports minus imports. It has, according to critics, some significant omissions. If a child is placed in daycare, for example, daycare payments increase GDP. If a parent provides the care, the value of that service is not reflected. Similarly, complex global supply chains often rely on the intellectual property of one country and elements of a multitude of others. However, the value is not distributed, but recorded as GDP for the country shipping the final product. “It’s easy to say it’s a crappy metric, but what to replace it with? It’s like all accounting. There are choices made about what to measure,” said finance professor Christian Lundblad. at the University of North Carolina at Kenan. Flagler Business School. The next GDP figures “will show a recession in the back of the envelope. It doesn’t mean anything.” Many economists and policymakers share the view that first quarter US GDP was just one more outlier at a time when it was difficult to distinguish between the economic signal coming from the data and the noise caused by the pandemic. The first quarter “I don’t think GDP was negative” because it was driven by seemingly one-time changes in things like imports and inventories, Richmond Federal Reserve Chairman Thomas said recently. Barkins. “Private sales and domestic purchases have been healthy.” The second quarter figure should reflect stronger evidence of a real slowdown. In particular, consumer spending, once adjusted for inflation, appears to be slowing. Personal consumption is a major component of the US economy, and is expected to decline following the surge in spending during the pandemic. Indeed, Federal Reserve officials note, the higher interest rates they use to fight inflation are supposed to slow demand, so to some extent negative GDP could be healthy if it helps to slow price increases. With demand for workers still high, Fed officials are hoping that can happen without too much change in actual employment – and without a real recession. “The path we’re on is supposed to dampen demand,” Barkin said in comments ahead of the current Fed blackout period. “The issue is whether we have gone too far.” A closely watched series produced by the Atlanta Fed, called GDPNow, tracks the influence of incoming data on estimated GDP for the current quarter. The initial estimate for the second quarter started at 1.9pc at the end of April. It fell to -1.6pc on July 19, with the biggest change coming from a drop in the expected contribution from personal consumption. Where GDP measures production, gross domestic income measures wages and the profits that come from its sale. In theory, the two should be the same, but right now there’s a rift between them. It could mean trouble. If income is driven by rising employment and output is actually falling, this implies a collapse in worker productivity. Employers may be hoarding workers because it’s hard to hire, and if business is down, they may also be quick to lay off people, converging revenue into production. But there is another possibility. With the pandemic upending GDP estimates, it could be, as St. Louis Fed Chairman James Bullard recently put it, that “the GDI measure is more consistent with observed labour markets, which suggests that the economy continues to grow”. Eventually, the two should move closer together again, and economists will be watching closely to see which moves closer to the other. “Either output will begin to rise as the economy avoids recession,” Jason Furman, a fellow at the Peterson Institute for International Economics, recently wrote, “or employment will begin to fall as the economy slips into recession.”.