US Bureau of Economic Analysis Makes GDP Changes: Good or Bad?

In the UK, when the previous labor government didn’t like the growth figures or rate of inflation, they were accused of simply changing the way it was measured to massage the figures.

I doubt anyone will accuse the US Bureau of Economic Analysis (BEA) of doing the same, but an interesting article in the Economist Intelligence Unit (EIU) explores changes that have just been made in the way the BEA measures the US economy and the consequences of those changes.

Such changes only happen once in a long while – for obvious reasons, it would create havoc to frequently change the way we measure GDP, but it makes sense once every 10 years or so to review what we measure and how. On this review, the government’s biggest change was to add new kinds of spending to its GDP calculation.

Typically, economies are measured on how much is spent by consumers, businesses and, of course, government. Historically, the US government has excluded certain kinds of spending from its estimates of business fixed investment, such as research and development, as well as the cost of producing original entertainment, literary and artistic works. They weren’t considered fixed investments, the EIU tells us – or that was the view, at least, until now.

The government’s revised view is that R&D and original entertainment works are valuable intellectual property that do, indeed, have lasting value and are an important part of the economy. So what, you may say, surely that’s not such a big change?

Well, actually it is.

For a highly creative economy like that of the United States, it’s an additional $560 billion of change, a 3.6% increase in the size of the economy, or as the EIU puts it, about the size of Sweden added overnight!

The EIU points out that far from being an academic change, investment in intellectual property is an example of innovation, which most economists agree is an important driver of economic growth. IP investment also contributes to improvements in productivity, which raises standards of living. By measuring investment in this way, its role in the economy can be better evaluated.

Backdating

The broader changes in GDP measurement made by the BEA have been backdated and significantly alter the rearview mirror.

For example, the EIU points out, 2012 was a surprisingly good year for the US economy, which by the new measure expanded by a robust 2.8% – much better than the previous 2.2%, and the best single year of growth since 2005. The recession in 2009, the BEA now states, was not quite as bad as was thought; GDP contracted by 2.8% instead of 3.1%. What worries us, though, is the steady loss of growth over the longer term.

Between 1959 and 2002, GDP growth averaged 3.4%. During the last decade, it has averaged a much slower 1.8%.

All in all, an interesting review of the changes, awareness of which will help us avoid the mistake of looking at new GDP results and comparing them to historical records measured under the old rules.