3Q GDP (advanced estimate) – and changes coming

The U.S. economy picked up speed in July-August-September time period (3Q 2012) according to news from BEA this morning. GDP grew by 2% in the third quarter, compared with 1.3% in the second quarter. GDP grew by 2& in 1Q 2012 and 4.1% in 4Q 2011. The 3Q 2012 growth rate was slightly higher than economists’ forecast of 1.8% (according to the Wall Street Journal).
Much of the increase was a sharp increase in government spending on national defense and in residential construction. Business investment in equipment and software was flat (0.0% change) compared with a 4.8% increase in 2Q 2012. As I have noted before, the data has a basic problem in that it does not give us any guidance on investment in intangibles other than software. So we do not know whether companies have increased or decreased their investments in important areas such as human and organizational capital.
As I’ve also mentioned before, BEA has plans for a major revision in the GDP calculations next year. Two big changes will help make the GDP data more accurate: capitalization of research and development (R&D)and capitalization of entertainment, literary, and artistic originals (movies, music, books, art work, etc.) Currently, both R&D and the cost of creating entertainment, literary, and artistic originals are treated as a direct expense. Under the new system, they will be treated as investments, as they should be since they have long paybacks not just immediate returns.
As part of this shift, investments in these items with be specifically captured in the nonresidential fixed investment data. There will be separate data for software (now a subcategory of equipment), R&D, and entertainment, literary, and artistic originals. This should allow us to get a better picture of the I-Cubed Economy.
Final note: the BEA data on GDP is the “advanced estimates” subject to potentially large revisions. The next revision will be released on November 29.

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