GDP can be measured in three ways, by summing output, expenditure or income across the economy. The Office for National Statistics (ONS) relies on output information for early estimates of GDP growth, with expenditure and income data incorporated during the subsequent revision process.

The fall in GDP in the third quarter was last week revised from 0.4% to 0.3%. Many economists expect a further upgrade as the ONS improves its measurement of output and incorporates more information on expenditure and income. These hopes, however, are not supported by early data based on the alternative approaches.

Separate output, expenditure and income measures of GDP can be calculated from background information supplied by the ONS. The output measure fell by 0.3% last quarter – the basis for the published GDP drop – but the expenditure and income measures registered larger declines of 0.5% and 0.9% respectively. (These figures refer to "unaligned" estimates excluding adjustments to reduce discrepancies between the three approaches.)

The chart shows published GDP at constant market prices, indexed to calendar 2005, together with the three underlying measures. In level terms, the expenditure measure was in line with published GDP last quarter but the output and income measures were lower. A simple average of the three was 0.2% below published GDP. This indicates that the published measure already incorporates an assumption of future upward revisions to underlying data.

The chart also reveals a disagreement between the three measures about the start-date of the recession, with output – and published – GDP peaking in the first quarter of last year but the expenditure and income measures one quarter later.

Recent sluggish broad money growth in the US and UK is unlikely to signal economic weakness since investors are voluntarily shifting out of cash in response to low interest rates and perceived opportunities in markets. Reduced money demand releases additional liquidity to support economic expansion.

In further evidence of this shift, UK retail buying of mutual funds (unit trusts and OEICs) was again solid at £2.4 billion in October, according to Investment Management Association figures. Inflows are on course to exceed £25 billion for the year as a whole, well above the previous annual record of £17.7 billion in 2000.

The chart shows six-month growth in "M4 excluding other financial corporations" – i.e. money holdings of households and non-financial firms – together with a six-month running total of retail mutual fund flows, expressed as a percentage of the M4 measure. Fund buying has been on a similar scale to the rise in the money supply recently.

In the current context, the sum of money growth and mutual fund flows is probably a better guide to liquidity support for the economy than M4 itself. This indicator – the green line in the chart – bottomed in late 2008 and recovered significantly during the first half, with faster expansion maintained recently. This supports hopes of an imminent economic pick-up. (See previous post for a similar US analysis.)