That shrinking GDP number

This morning, BEA released its third estimate for 1st quarter 2013 GDP. And the number is 1.8% (the growth in the size of the economy) — down from both the first estimate of 2.5% and economists’ original prediction of 3.2% (see earlier posting). So, what happened? According to BEA “real GDP primarily reflected downward revisions to personal consumption expenditures, to exports, and to nonresidential fixed investment that were partly offset by a downward revision to imports.” The Wall Street Journal elaborates, “downward revision came from services, with spending on legal services, personal care and health care weaker than previously estimated.” In other words, earlier projections on some key areas, such as trade and services, were off.
This illustrates the standard problem in any data collection effort: timeliness versus completeness. There is a reason why BEA now calls the series of report the first, second and third estimates — as opposed to using the term “final estimate” as in the past. These numbers are based on incomplete data. For example, the first estimate comes out before the trade data for the entire quarter is available. Other key piece of data are subject to revisions as well as new data becomes available.
Keep this especially in mind next month. Next month BEA is making a major revision in the GDP calculations. Two of the 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 will 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. These changes will occur on July 31 with the release of the first estimate of GDP for the 2nd quarter of 2013 and will include revisions going back a number of years (in some cases to 1929).
While this should allow us to get a better picture of the I-Cubed Economy, there will be those who will shout “Obama Administration is fiddling with the numbers.” Untrue and unfair. As the revisions show, these numbers are not set in stone and handed down from on high. They are estimates based on best available data — and therefore changeable.
And for those who decry the changes in GDP to better account for intangibles, I have one simple question: do you really think ignoring the largest part of the economy (i.e. intangibles) give us a better picture of what is going on? Really? If you want to spend your time glued to a rear view mirror that shows you where you were 50 years ago, fine. Just don’t expect that view to correspond to any version of current reality.

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