Intangible in latest 2Q GDP estimate

Last month I reported that the second estimate to the 2nd quarter GDP substantial revised the growth in “intellectual products.” This new category of business investment includes research and development; entertainment, literary, and artistic originals; and software. The first (advanced) estimates showed business investment in this subset of intangible assets growing in the 2Q by a healthy 3.8%. In the second estimate, these investments were revised to show a decline by 0.9%. According to today’s third estimate data from BEA, the decline in intellectual property investments was actually slightly higher at 1.5%. That compares to an increase of 3.7% in the 1Q. Note that the overall growth rate for GDP remained at 2.5% in the third estimate.
Since this third estimate is based on more complete data, it is unlikely to be substantially revised in the future – although that could happen. The size of the revision between the first and second estimates continue to be worrisome. We will see in the next two months when the first (advanced) and second estimates for 3Q GDP come out. A large revision would indicate the difficulty of getting data on these investments in a timely fashion (at least quickly enough for the first estimate). If that is the case, BEA will need to work on making that first (advanced) estimate more accurate if it is to continue to be a useful measure.

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The coming test of crowdfunding and JOBS Act

Today is being hailed by some as a major milestone in crowdfunding with the implementation of new SEC regulations. As Crowdfunding Insider notes (“Preparing for (Regulation) D-Day”):

For the first time since the enactment of federal legislation in 1933, companies will be allowed to publicly solicit investors and advertise the sale of securities without registering the offering with either the SEC or any state if certain requirements are met – most notably, that the company have appropriate procedures in place to verify that all investors who purchase the securities are “accredited investors.”

This one of the steps in implementing the rules concerning crowdfunding in the JOBS (Jumpstart Our Business Start-ups) Act of 2012. Last week, another provision of the JOBS Act took center stage when Twitter announce (via a Tweet of course) that is was preparing an IPO using the new provisions under the JOBS Act. Those provisions allow certain companies to submit a confidential S-1 filing with the SEC. The information in the filing will eventually be made public before the actual IPO. But the provision gives companies gives companies a chance to vet their offering before the details are made pubic to all. They may change it or withdraw the offering completely without revealing sensitive financial information.
Both of these actions highlight the coming tests for the JOBS Act. In a piece (from last month) in Forbes (“Five Things the General Public Should Know About Crowdfunding”), Cameron Cushman from the Kauffman Foundation lays out some key truths. Three of those truths involve what can go wrong: people will lose money; there will be fraud; and there will be big successes and big failures. As a New York Times piece last Saturday (“With a Tweet, Twitter Starts a Debate“) notes not everyone is happy with new IPO process. Big institutional investors are reportedly concerned about other provisions that loosen audit requirements. Even if the Twitter IPO is a huge success (from both the company and investors point of view), there are likely to be at least a few that resemble Facebook or Groupon.
The test will be how the system handles the inevitable problems. As I’ve said before, the JOBS Act and crowdfunding represents a tremendous opportunity for funding entrepreneurs. But there will be failures and there will be fraud. Already there is an issue of so-called “blank check” companies attempting to use the law to circumvent standard regulations (see earlier posting). In an earlier posting, I made the point that the JOBS Act needs to be seen as a regulatory experiment. How the experiment is monitored and modified will determine the JOBS Act’s ultimate success or failure.

August employment data

The BLS has just released the August employment data and the indications are of a status quo economy: the unemployment rate down by 0.1% to 7.3% with an 169,000 increase in employment. Economists had expected an increase of 180,000. The average rise in payrolls so far this year has been 192,000 jobs a month. BLS also revised the job growth in July downward.
The potentially good news is that the total number of involuntary underemployed (part time for economic reasons) declined dramatically in August. This was due to a sharp drop in those on slack work. The number of workers who could only find part time
work rose slightly. The drop in slack work may signal an increase in production.
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July trade in intangibles

The July trade figures are out and the trade deficit is up somewhat — rising $4.6 billion to $39.1 billion. Exports were down by $1.1 billion and imports were up $3.5 billion. This slightly more than the $38.6 billion deficit economists had predicted. The deficit increased for both petroleum and non-petroleum goods as imports of cars and fuel rose.
In good news, our trade surplus in pure intangibles rose by $166 million to $16.2 billion as exports of business services rose slightly more than imports and royalty receipts (exports) rose slightly more than royalty payments (imports). Year over year, imports of pure intangibles have down slightly for the last 7 months while exports have grown at a healthy rate.
The really bad news however is the surge in the Advanced Technology deficit to $8.3 billion from June’s dramatic low of $3.4 billion. It is beginning to look like June’s level was an aberration and the Advanced Technology deficit is returning to its unhealthy normal level. Every category showed a deterioration with exports down and imports up, led by a $1.6 billion drop in aerospace exports. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
Advanced Technology goods also represent trade in intangibles. These goods are competitive because their value is based on knowledge and other intangibles. While not a perfect measure, Advanced Technology goods serve as an approximation of our trade in embedded intangibles. Adding the pure and embedded intangibles reveals an overall surplus of $7.9 billion.
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Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:


Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.


Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.