Wednesday, 7 August 2013

The Big Data Makeover of the US economy

There has been a lot of talk recently on the newest data revisions of some of the main US economic national accounts. The US Bureau of Economic Analysis (BEA) has revised the methodological definition of how they measure gross domestic product and has adjusted the previous US GDP data all the way back to 1929. As they usually do once every five years. The change this time is an expanded definition of investment to include intangible assets, thus adding 3.6 % to the size of GDP in 2012 (around $560bn). The revision seems reasonable enough; the BEA wanted to include all the benefits of innovation, R&D and things like intellectual property, software and even entertainment, literary and artistic originals. Certainly things the US is abundant of, and certainly things that contribute well to the US domestic output. R&D by itself added 2.5% to overall output (see graph below), as it is not anymore in the 'cost of producing other products' category. There were a number of other small revisions as well, even for some older years. You can read them all on the BEA pages. In addition, FT Alphaville has a very good guide on GDP revisions and what they really mean. The Financial Times also reports some charts that signal this significant makeover.

Source: Financial Times
The biggest piece of news from the revisions is that the Great Recession of 2008-09 wasn't that "Great" after all. It appears to have been shallower than perceived, and followed by a more stronger recovery. The decline in 2009 was apparently only 2.8%, where the 0.3 percentage point upward revision was due to changes in unpriced banking services (the value of service for holding bank accounts).

In terms of real GDP growth, things have changed as well. In 2010 growth was revised upwards from 2.4 to 2.5%, stayed the same 1.8% for 2011, and revised upwards from 2.2% to 2.8% in 2012. The average growth rate from 2009 till 2012 (since the start of the recovery) is still a mere 2.4%. For a robust recovery it needs to be above the trend for a couple of years in order to get back on it. Unless of course the US is on a completely new trend line, and on a completely new equilibrium path. Btw, the average annual growth rate of real GDP from 1929 to 2012 was 3.3% (the benchmark trend line).

Source: Financial Times
An important change is also in the personal savings rate, now slightly higher than before. The upward revision was about 1 percentage point higher. The reason is the way they account for pensions. Before the BEA only counted direct pensions payments, but now they calculate the full value of all pensions promised, as well as the interest on the part that wasn't paid. The real question is will this induce consumers to spend more? Not likely. This is a purely methodological revision. It doesn't mean the people suddenly have more money. It just means it's accounted for differently. Consumers (and businesses btw) still have the same expectations of future income and they still face the same constraints as before - huge household debt and massive deleveraging. So even though the savings rate is now calculated to be higher, this doesn't imply a reversal of the savings rate trend nor the reversal of the deleveraging process (more on that here).

Source: Financial Times
Finally, have in mind that the measure of gross domestic product in itself is hardly the perfect measure of economic well-being (growth rates are different, they suggest the overall trend of the economy). This is precisely why GDP is often subject to revisions. However even with all the revisions there hasn't been any dramatic effect on the overall patterns of economic activity, nor historically, nor during this business cycle. And frankly, any number of methodological revisions of national accounts are hardly going to persuade people that we in fact did have a robust recovery, and that the economy is doing pretty well at the moment. Maybe it is, maybe this is the new normal for the US, or maybe it's just a temporary restructuring and respecialization. In terms of consumer and investor confidence, revised data from the BEA won't make people or businesses spend again. Only policy changes in terms of cost-cutting incentives can do that.

2 comments:

  1. First they have changed CPI calculation (food and energy excluded), now they change GDP calculation.
    Americans would say "I smell a rat here". First, if you look at the R&D and film or music projects as an investment is looks pretty obvious that salaries and other HR payments (to researchers, actors, musicians and so on) are very significant part of that “investment”. So, these payments are calculated once as a part of GDP. And then, the same sum of money (or most of it) is consumed by the people who received it, most probably the very same year. Thus it is now calculated again as a part of GDP, only this time as consumption.
    A little weird, isn't it?
    Now look at the consequence: the debt/GDP ratio changes. And everybody is happy, especially politicians. Now they can borrow and spend more…

    Zoran Low

    ReplyDelete
    Replies
    1. Excellent point, something does smell awfully fishy, particularly the inclusion of expected pension payments.
      None of the methodological revisions have changed the direction of the business cycle, or even its magnitude (although that's debatable to some extent). Finally, the only thing they could impact was the debt/GDP ratio, even though the change wasn't that big. The debt ratio still looks unsustainably high

      Delete