Gdp: Something Doesn't Add Up Here
GOP Presidential nominee Bob Dole charges that the U.S. is stuck in the slow-growth doldrums. And the official numbers appear to bear out Dole's charge. Even with a surge of growth this spring, the government's numbers show only a 1.9% growth rate since the beginning of 1995--hardly the stuff that dreams are made of.
But are things that bad? A new look at the data suggests that growth over the past couple of years may be stronger than it appears. The usual measure of growth is gross domestic product, which is figured by adding up the output of the economy. But government statisticians also calculate gross domestic income--the total of wages, profits, interest, and rents in the economy--and this number tells a very different story.
Over the past 18 months, personal and business income, adjusted for inflation, has grown at a rate of 2.7%, almost a full percentage point faster than output. These income gains are being powered by the unlikely combination of soaring corporate profits and rising wages. Indeed, incomes grew by $70 billion more than output in the year ended in June, boosting GDI growth to a 3.5% rate compared with the 2.6% gain in reported GDP.
The discrepancy can't last forever. In theory, incomes and output should be equal. This time next year, the Commerce Dept. will revise its numbers and bring the economy's books as close to balance as imperfect statistics allow. Yet the unusual income gains suggest that in the final analysis, the economy of the mid-1990s will look stronger than current statistics--or gloomy campaign rhetoric--indicate. "When the revisions are finished, I suspect we'll find somewhat more GDP than we've got now," says Christopher Probyn, director of forecasting for DRI/McGraw-Hill.
"WE HAVE HOLES." Not surprisingly, President Clinton's economists think so, too. "We know that we aren't adequately measuring the growth of this economy," says Joseph E. Stiglitz, chairman of the White House Council of Economic Advisers. "When we see gross domestic income growing a point faster than GDP, that suggests that we're underestimating both actual and potential growth." The economy's potential is the rate--currently pegged at around 2.3%--at which it can grow without increasing inflation over the long term.
Other economists--including the keepers of the statistics--downplay the gap's importance. "We rely more on the expenditure figures because historically they've been more accurate," says J. Steven Landefeld, director of the Commerce Dept.'s Bureau of Economic Analysis. "We have holes on the income side on the order of hundreds of billions of dollars." One example: The bureau estimates small corporations' profits based on the reported earnings mf large companies, then checks those projections against tax-return data. But the bureau still hasn't received tax figures to check its 1994 statistics. Estimates of the incomes of sole proprietors and other small businesses are even shakier, since the Internal Revenue Service hasn't done the intensive audits needed to measure under-reporting by sole proprietors since 1988.
But the recent gains in income-measured growth are likely to resist statistical efforts to scrub them away. The strength of corporate profits comes as no surprise to anyone who has watched Wall Street for the past year. Profits surged 16.5% before inflation over the 12 months ended in March, the latest government numbers available.
Labor compensation--which makes up almost 60% of GDI--is on the rise as well. Real wages are up slightly, while the number of jobs has increased by a solid 2.2% since last summer. If growth was faster than realized, that would help explain how wages and profits could both be up--and how stocks can be so hot when the economy seems so cool.
More evidence of faster growth can be found in the government's tax collections, which are coming in stronger than expected. Federal tax revenues depend on the amount of income flowing through the economy--the more wages and profits, the bigger the take for the tax collector. This fiscal year, revenues are beating projections by $22 billion.
While government statisticians may prefer the data on the output side of the ledger, those figures seem to miss plenty of growth. For example, the official numbers have a tough time measuring output, quality gains, and productivity growth in the rapidly expanding service-producing side of the economy. As a result, some economists believe that real economic growth could be understated by a full percentage point.
None of these numerical arguments will matter on the campaign trail. Voters respond to what they feel in their wallets, not to statistics. Dole is hoping his call for a 15%, $548 billion cut in personal taxes will resonate with voters worried about their own jobs and incomes. But if the income statistics are telling the true story of a faster-growing economy, the Republican candidate may find a lot less anxiety--and a harder time collecting votes--than he expects.