Great Depression Stays With Us After Revisions
Get ready for some Big Data, or just a lot of it all at once.
Next week, the U.S. Bureau of Economic Analysis will unveil its 14th comprehensive revision to the National Income and Product Accounts going back to 1929. For months, the BEA has been publishing explanatory articles, PowerPoint presentations, sample tables, frequently asked questions, and FAQs on the FAQs on its website in preparation for the July 31 release.
It isn’t just new source data, such as the quinquennial Economic Census, that are the basis for the revision. Every five years or so, the BEA redefines and reclassifies some activities to better reflect a changing economy and comply with international standards. With the help of new methodologies, the BEA hopes to present an accurate picture of gross domestic product and gross domestic income.
Don’t expect the revisions to make the Great Depression look less so. Any changes to ancient history are a result of the reclassification of certain items and recalculation of GDP and GDI.
The biggest change this year is the treatment of spending for research and development. Both government and private research and development will now be classified as investment and depreciated in future years, according to a prescribed schedule. Previously, R&D was treated as a business expense. In 1999, the BEA made a similar definitional change when it reclassified software spending as a fixed investment to reflect its growing role in business.
In recognition of the increasing value of intellectual property, the BEA will begin to capitalize long-lived artwork, such as television programs, books and movies, instead of treating them as a production expense. The change in the treatment of various forms of “intangibles” spending will have the effect of raising the level of nominal GDP in 2007 by 3 percent, according to the BEA.
“The GDP will be larger in a statistical sense but not any healthier,” says Neal Soss, chief economist at Credit Suisse Group AG in New York. He says the reclassification of spending as investment is analogous to measuring something in meters versus yards: Only the unit of measurement is different.
The other big change is to transactions in defined-benefit pension plans from a cash-accounting basis to an accrual basis. Instead of counting a company’s contribution to the pension plan as employee compensation when it is made, the new methodology will measure the value of pension benefits as they accrue. That accounting change will boost both personal income and the savings rate.
If your pension plan happens to be underfunded, such as Detroit’s, BEA said it “will recognize an imputed interest expense associated with the underfunding.” And there’s always the 15th comprehensive revision in five years for further clarification!
Enough with the accounting. Let’s move on to what the revision won’t do. It won’t answer the question of why businesses have been hiring at a faster pace than justified by reported output. Real GDP rose 0.4 percent in the fourth quarter, 1.8 percent in the first and an anticipated 1.3 percent in the second quarter, according to a Bloomberg News survey.
Employment and wage data through the fourth quarter of 2012 have already been revised based on information from the Quarterly Census of Employment and Wages, a report covering 99 percent of civilian workers in this country. It wouldn’t be a surprise to see recent GDP data, at least through 2012, revised upward as a result.
That’s because data revisions tend to be procyclical. It’s true for quarterly GDP as well as monthly statistics. For example, when the economy is expanding, revisions to payrolls are generally positive as more complete survey data become available. That trend has been evident recently, with the second and third revisions to monthly jobs data showing stronger hiring than originally reported. The reverse is true during recessions.
The revisions will do nothing to change the perception that the current expansion has been mediocre to poor. Just for some perspective, the last comprehensive revision to the national accounts, in 2009, raised the average annual growth rate of real GDP from 1929 through the first quarter of 2009 by 0.1 percentage point, to 3.4 percent.
Even after next week’s revision, the first half of 2013 may remain a mystery. Anemic GDP doesn’t jibe with average job increases of 200,000 a month. Output is much weaker than either GDI or tax revenues, even if you adjust for the tax-rate increase at the start of the year.
Not to worry. This year’s GDP data will be revised, benchmarked and then undergo a comprehensive retooling in five years. Like death and taxes, data revisions are one of life’s certainties.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist.)
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