My recent article, ‘Economic Recovery by Statistical Manipulation’,
written July 29, 2013, forewarned that revisions to US GDP data due on
July 31 for the April-June quarter would likely show a larger GDP and
growth for the US for the quarter, as well as for earlier years. GDP data published today, July 31, 2013 by the US government’s Bureau of Economic Analysis (BEA) have confirmed that prediction.
A poll of dozens of economists by the Reuters international news agency prior to the 2nd quarter GDP data release showed professional economists were collectively forecasting no more than 1% GDP growth for the 2nd quarter. As noted in our previous article, some were forecasting GDP as low as 0.5% for the quarter. The BEA’s GDP first estimate for the 2nd quarter indicates a 1.7% GDP growth. What happened to explain such a great divergence from forecasts and the BEA data?
As Reuters notes, in a follow up to the BEA release, “comprehensive
revisions to the data cast the economy in a better light than previously.” Not only has the most recent quarter of GDP been boosted, from 1.1%
in the first quarter of 2013 to 1.7% now in the second (compared to
forecasts of 1%), but GDP for all of calendar 2012 has been revised
upward as well, from the prior official 2.1% to 2.8%. That’s a 33% upward revision.
Today’s GDP revisions—which will continue henceforth to boost future
GDP numbers—focus largely on boosting the contribution of business
investment to GDP.
The revisions have resulted in significant increases in the estimates
for business investment and will continue to do so in the future.
It is not necessary to bother readers with the arcane details; suffice
to say that the boosts to investment totals have to do with changes in
how depreciation is calculated, pension accounting, and other items. The
changes in depreciation in particular have resulted in GDP upward
revision.
Since GDP is part of what’s called the ‘National Income Accounts’. Like all accounting, there are two sides to the ledger.
GDP measures the value of goods and services produced in the economy;
the other side of the accounting ledger is GDI, or gross domestic
income, which measures the corresponding income generated from that
production.
That means that the upward revision based on depreciation-driven
business investment translates into an upward revision of business
income in GDI.
As economist Dean Baker has noted in his commentary on the revisions
today, “The new measure added $250 billion to depreciation in the
corporate sector for 2012” and that “the profit share of net corporate
output (as percent of GDP) rose to 25.5 percent in 2012, the fourth highest share in the post-war era.”
A closer inspection of the 1.7% US 2nd quarter GDP number shows almost all of the major gains in the economy came from business investment.
There are four major ‘areas’ of GDP: government spending, exports in
excess of imports, consumer spending, and business investment.
The Reuters commentary on today’s GDP release indicated that consumer
spending (70% of the US GDP) slowed in the second quarter significantly
from the first. So it doesn’t explain the 1.7% unexpected GDP rise. Similarly, government spending (typically 24% of the economy) contracted for the third straight quarter.
So nothing is there to justify the 1.7%. Exports rose, but imports rose
faster, which translates to a negative contribution to GDP.
It was mostly “a turnaround in investment in nonresidential structures
and gains in outlays on equipment and intellectual products”, according
to Reuters, which explains the 1.7%.
Not surprisingly, that’s the precise area in which the GDP upward revisions have been focused.
Change the way depreciation is defined, adding to corporate profits in
addition to the already record growth for profits, throw in new
categories of what constitutes business investment—and now you have a
30% or more higher GDP.
If you can’t generate a sustained real economic recovery for five years
with past and current economic policies—then just redefine the
definition of recovery itself.
To go to Jack Rasmus' first article on 'Economic Recovery by Statistical Manipulation', click here
Source: ZCommunications