New data series on goods trade balance

Starting today, the Census Bureau is publishing a new advanced trade data series. This advanced data covers trade in goods only. (See Census Bureau notice.) Since this excludes services and intangibles trade, I will not be covering this data carefully
The next release of the full set of trade data is next week. I will publish my analysis of intangibles trade then.
According to Census, the goods trade deficit jumped from $59.7 billion in May to $62.3 billion in June. Export were down and imports up.

2Q 2015 GDP – advanced data

GDP data released this morning from BEA shows the US economy growing at an annual rate of 2.3%. Economist had predicted an annual GDP growth rate of 2.5%. This rate for the second quarter of 2015 is a large increase over the anemic 0.6% for the first quarter. And that revised figure for the first quarter was better that the previous data showing a contraction in the economy.
Investment in Intellectually Property Products (IPP) slowed down slightly to 4.9% from 7.4% in the 1st quarter of 2015 and 7.4% in the 4th quarter of 2014. [This is a revision downward for earlier quarters from previously published data.] R&D grew by 5.2% compared to 6.9% in 1Q and 8.8% in the 4Q. Investment in software grew by 7.8% compared to 9.1% in 1Q and 5.6% in 4Q. On the other hand, investments in entertainment, literary, and artistic original dropped by 2.4% while growing by 2.2% in 1Q and 4.9% in 4Q.
Today’s BEA release also contains data revisions going back to 1969. This includes earlier data on Intellectually Property Products. More analysis later of both the revisions and what the data tells us about previous decades.
IPP parts 2Q15 - 1st.png

The Conference Board on productivity and intangibles

From a recent blog by The Conference Board – Blaming the productivity slowdown on measurement issues takes our eyes off the ball:

The key factor to drive productivity is investment. In the 1990s it turned out that, once we measured the price changes for investments in computers and software well, we did find their impacts on productivity growth. Today, more than at that time, we need to focus on the complementary investment in intangible investments. Concerns about measurement might as well focus on those types of investments which are only partially measured as investment to begin with. The capitalization of R&D and software in the National Income and Product Accounts is an important step forward. But only once the other spending on intangibles, including workforce training, organizational innovations and marketing and branding, is also treated as investment rather than expenditure, we will get a sharper view of where the productivity gains from new technology have ended up.

Amen.

Service economy?

The standard image of the U.S. economy is one of two mega-sectors: manufacturing and services. This is both is outdated and misleading. It is still basically based on Colin Clark’s 1940’s division of the economy into primary, secondary and tertiary. Over the years this has been simplified to goods versus services as the extractive industries (primary) have been lumped with the manufacturing (secondary) industries. This classification has been commonly used to declare that the U.S. has become a service economy.
However, using this framework to measure employment shows that the U.S. has been a “service” economy for 100 years. Employment data on agriculture/fishing/mining (primary), manufacturing, construction and services shows the US jumped from directly from agriculture to services. We were never a majority manufacturing economy. Manufacturing peaked at around 27% of total employment in 1920 (30% for combined manufacturing & construction) with services at the same time comprising around 41% of total employment.
Employment 1840-1960.png
That most people work in service industries tells us little about the structural changes occurring in the economy. This is why I am publishing employment data as tangible-producing and intangible-producing. See my see most recent posting and my new report Employment in tangible-producing and intangible-producing industries: Preliminary findings and methodology.

Employment in tangible and intangible industries – methodology

As readers of this blog know, I have been publishing monthly employment data in an alternative framework (see most recent posting). That framework divides employment into jobs in tangible-producing industries (including tangible services) and jobs in intangible-producing industries.
Today I am releasing a working paper describing the methodology in greater detail. The analysis attempts to translate the existing goods & services dichotomy into tangible & intangible.
Tangible activities are primarily physical; intangible are primarily mental. Cutting hair, ringing up a sale at a cash register, making a car, harvesting a crop–all of these are primarily a physical activity. The transaction involves the movement of atoms. Designing a poster, negotiating a deal, writing an article–these are primarily mental involving the manipulation of information bits.
Intangible, mental activities are more important than ever in this information economy. But tangible, physical activities are just as important. Some of those physical activities are captured by the current classification system as part of construction, agriculture and manufacturing. And some of those mental activities are correctly classified as services. But only some. For example, the construction sector contains many mental activities such as architecture, engineering and logistical planning. The service sector contains physical activities, such as truck drivers, barbers and gardeners.
I plan to refine the methodology and continue to publish monthly updates.
Matrix.png

Intangible Assets as a Framework for Sustainable Value Creation

Athena Alliance is pleased to release a new working paper on Intangible Assets as a Framework for Sustainable Value Creation.
To become and remain successful, companies have come to understand that they need to follow a strategy of seek sustainable value creation. As a recent report notes, “Sustainable Value Creation is a core business strategy focused on addressing fundamental societal issues by identifying new, scalable sources of competitive advantage that generate measurable profit and community benefit.” The ultimate goal is for the company to achieve growth and high performance.
Intangibles are key value creating assets that need to be developed and utilized in order to achieve growth–and to successfully implement a strategy of sustainable value creation. This new paper explores the various frameworks for viewing intangible assets and the possible roles of the frameworks within a company.
There are five differing approaches and frameworks highlighted in this survey:
   • Accounting framework — financial control
      including financial and value creation models
   • C-H-S framework — macroeconomic growth accounting/theory, including productivity
   • Integrated reporting — corporate reporting
      including Sustainable Accounting Standards
   • ICounts — management
   • OECD Knowledge-based assets — public policy
Different parts of an organization will utilize different frameworks. CEOs need to understand how various parts and functions within the organization look at and talk about intangibles. Otherwise, what the CEO will see will be a cacophony of concepts that will more resemble noise than information.
While the different frameworks have different uses, an overall high-level conceptualization is needed to guide CEO thinking. That high-level archetype might best start with an integration of the and ICounts frameworks and weave in the C-H-S framework (for understanding inputs and macroeconomic affects) and expanded accounting models (for financial controls). Putting together such a high-level view that operates with the more specific models would be a useful undertaking. For a CEO’s perspective, it would be a valuable tool in creating and implementing a strategy of sustainable value creation.
[This paper was originally commissioned by The Conference Board for their use. It is published here in a slightly modified version with their permission. The author would like to thank The Conference Board for their financial support.]

What to do about training

Training seems to be the policy du jour for what ails the economy. The President and presidential candidates visit training site to talk about its importance. Think tanks write papers and organize conferences. But most of these activities focus on only part of the issue. A few months ago, I did a short piece for the Progressive Economy on incumbent worker training. Bottom line is that government programs target displaced workers and new hires, leaving on-the-job training for the existing workers solely to the private sector. But companies are not training as many workers as they did in the past.
Receiving.png
Training is not a once-and-done activity. It must be on-going and on-the-job. More needs to be done building on new state and federal government initiatives to help companies keep their workforce competitive.
For the entire piece (“Trade and training the American Workforce: Enhancing on-the-job worker training”) click here.

Here we go again on updating development bonds

It shouldn’t be this hard to make simple policy adjustments to cope with the intangible economy. But it is. Case in point is the Qualified Small Issue Manufacturing Bonds program (formerly known as Industrial Development Bonds – IDBs). As I have noted in a number of earlier postings, only traditional factories are eligible for low cost financing under this program. The 2009 stimulus bill included a minor change to allow the use of these bonds to finance facilities manufacturing intangible property. The change allowed local government to support new facilities for software development or bio-tech research facilities, for example, as well. But that provision expired at the end of 2010 and was not included in any tax extenders legislation. This simply act of putting physical and intangible investments on the same footing was forgotten and ignored.
Now comes the latest attempt to rectify the situation (see early posting for the last time). Just before the July 4 recess, Representatives Randy Hultgren (R-IL) and Richard Neal (D-MA) (re) introduced the Modernizing American Manufacturing Bonds Act – H.R. 2890.
The Council of Development Finance Agencies (CDFA) describes the issue thus:

Issue Brief:
Qualified Small Issue Manufacturing Bonds are the bedrock financing tool for small- to mid-sized manufacturers. This financing tool has been providing affordable capital to our nation’s most important industry for over three decades. Current federal law defines a “manufacturing facility” as one that produces tangible property. However, manufacturing processes, production, and technology have changed significantly since this definition was established. Today’s manufacturers encompass more modern, high-tech, and intangible manufacturing practices such as bio-technology, energy generation, food processing, software, design and formula development, and intellectual property. In relationship to Qualified Small Issue Manufacturing Bonds (commonly known as Industrial Development Bonds or IDBs), the current definition as outlined in the tax code reflects an old philosophy and outdated approach to manufacturing. This outdated definition of manufacturing has resulted in the increasingly limited use of this job-generating economic development tool.
Recommendation:
CDFA proposes updating the definition of manufacturing as it relates to Qualified Small Issue Manufacturing Bonds to allow for companies who produce both tangible and intangible property to access the capital markets. The measure would broaden the definition to include facilities that manufacture, create, or produce intangible property. The expanded definition would be sufficiently broad to cover software, patents, copyrights, formulas, processes, designs, patterns, know-how, format, and similar intellectual property. Under this new definition, knowledge-based businesses could access low-cost, tax-exempt IDB financing. This updated definition would align the growing high-tech manufacturing sector with the tools necessary to finance industry growth and expansion. This change will make an immediate difference throughout the country to help retain and create jobs, spur manufacturing investment, and accelerate the nation’s economy.

By the way, the change is actually very simple as it builds on the existing definition in the tax code of intangibles. The specific addition to the definition of a “manufacturing facility” is one which “is used in the creation or production of intangible property which is described in section 197(d)(1)(C)(iii)”. That line in the Internal Revenue Code of 1986 refers to a very specific subset of intangibles as “any patent, copyright, formula, process, design, pattern, knowhow, format, or other similar item”. Thus the expanded program applied to only a narrow part of what we would consider intangibles. [Note that the term “section 197 intangible” for purposes of amortized tax deductions is much broader.]
Give that this is a simple fix, maybe this time something will get done?