The Neutral Level of NGDP and the NGDP Gap: Q3 2023

The nominal GDP (NGDP) gap, a measure of unexpected changes in the dollar size of the US economy, is calculated as the percentage difference between the actual and the neutral levels of NGDP. The neutral level of NGDP, in turn, is a sum of all dollar spending, or equivalently all dollar income, expected by households and businesses coming into a specific time period and is created using data from consensus forecasts. In the third quarter of 2023, the median NGDP gap rose to 6.45 percent, notably up from the previous quarter’s value of 5.70 percent. 

The 6.45 percent NGDP gap means that the dollar size of the economy, $27.62 trillion, was about $1.67 trillion greater than its expected size of $25.95 trillion. Moreover, NGDP was also greater than the 10th and 90th percentiles of the neutral level of NGDP, which shows that this gap was significantly different from zero during this time. [1] This means aggregate spending and income in dollar terms were materially higher than their expected values, and macroeconomic conditions continued to be accommodative in the third quarter of 2023. The NGDP gap shrank in the second quarter of 2023 but now has risen owing to the robust 8.54 percent annualized growth of NGDP in the third quarter.