U.S. Economic Growth Revised Up; Gap Between GDP And GDI Narrows Sharply

The U.S. economy's recovery from the COVID-19 pandemic was much stronger than initially thought amid massive fiscal stimulus, according to revisions on Thursday, which also showed the gap between the two measures of growth narrowing sharply in 2021.

Gross domestic product increased 5.9% in 2021, the Commerce Department said in its annual revision of GDP data. That was revised up from the previously reported 5.7% growth.

The economy contracted 2.8% in 2020, revised up from the previously published 3.4% decline.

"The pandemic recession from the fourth quarter of 2019 through the second quarter of 2020 was a bit less sharp than what is currently published," said Erich Strassner, associate director of National Economic Accounts at the Commerce Department's Bureau of Economic Analysis (BEA). "The recovery from the second quarter of 2020 has been a bit stronger."

The upward revisions to GDP in both years largely reflected more consumer spending, exports and federal government spending than previously reported.

Spending was boosted by government subsidies to households and businesses as part of a nearly $6 trillion in relief since the pandemic started in the spring of 2020.

GDP, the standard economic growth measure, is the value of goods and services produced in the United States. Economic activity in the nation is also assessed from incomes earned and the costs incurred in the production of GDP, expressed as Gross Domestic Income (GDI).

Revisions showed GDI rebounding 5.5% in 2021, revised down from the previously published 7.3%. GDI contracted 2.3% in 2020 instead of 2.9% as initially estimated. The downward revision in 2021 reflected revisions to several components, including net interest income, private industry wages and salaries, proprietors income as well as corporate profits.

In principle, GDP and GDI should be equal, but in practice differ as they are estimated using different and largely independent source data.

The gap between GDI and GDP, also known as the statistical discrepancy, is the sum of measurement errors in estimating the respective components of GDP and GDI. The statistical discrepancy widened sharply prior to the revision, attracting the attention of Federal Reserve officials and economists.

SUBSIDIES A CHALLENGE

With GDP revised higher and GDI lower, the statistical discrepancy narrowed to -0.6% of GDP in 2021. That was revised from the previously reported -2.3% and brought the statistical discrepancy in line with historical norms.

The gap was at -1.0% of GDP in 2020. Last year's initially reported unusually large statistical discrepancy in part reflected challenges handling the massive subsidies in the national accounts. According to the BEA, the blowout in the GDP/GDI gap had not led to changes in the methodology and there would be no changes in procedures going forward.

"There's no question that the record level of subsidies related to the pandemic certainly created challenges for harmonizing the story between GDP and GDI," Dave Wasshausen, chief of the Expenditure and Income Division at the BEA told reporters.

"All the COVID-related special effects tables have been posted. We've updated all of those tables and all along the goal has been to strive for transparency so people understand exactly how we're interpreting those programs and how to book them on the gross domestic income side of the accounts as subsidies or grants or what have you."

Subsidies were revised down to $478.8 billion in 2021 from the previously reported $490.0 billion. Tax credits to fund paid sick leave and employee retention accounted for the bulk of the revision. The initial projections for subsidies were drawn from Congressional Budget Office and Treasury Department reports.

The revisions were based on actual claims information from the Treasury Department's Office of Tax Analysis.

Overall, the GDP revisions to data from the fourth quarter of 2016 through the fourth quarter of 2021 did not change the economic picture. But the short pandemic recession was slightly less steep than previously reported.

The economy contracted 18.2% from its peak in the fourth quarter of 2019 through the second quarter of 2020, instead of 19.2% as previously reported. It was still the worst recession on record. The recovery from the second quarter of 2020 was a bit stronger than previously estimated, with the economy growing at an average annual rate of 9.8% through the fourth quarter of 2021, an upward revision of 0.2 percentage points.