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U.S. Economic Growth Stronger Than Believed: What We Thought We Knew About The Recovery


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Recently, on July 31st, the U.S. Bureau of Economic Analysis (BEA) released it comprehensive revisions of the National Income and Product Accounts (NIPA). This is a process that occurs once every five years, and incorporates the results of the most recent Economic Census and benchmark input-output accounts.

This new revision of NIPA has brought about major changes in the way real output is measured across the U.S. economy. Specifically, the U.S. GDP accounts now capitalize research & development (R&D); entertainment, literary, and artistic originals; accrual treatment of defined benefit pension plans; and add expanded capitalization of ownership transfer costs of residential housing. R&D is now treated more like a fixed asset rather than an intermediate input that is consumed by businesses during the production process. In other words, R&D expenditures are now “treated as an investment that generates future income and product.” Intellectual property creation is treated similarly.

These changes have had a significant impact on the overall level of U.S. Real GDP, although the path of growth has not been radically altered historically. For example, under the previous estimates, the base year for real GDP was 2005. This has been re-benchmarked to 2009 as the base year, which has resulted in a higher total level of U.S. Real GDP. Changing the base year has had the effect of increasing the level of real GDP from an estimated $13.7 trillion at the end of 2012 to an estimated $15.5 trillion economy. Note that the jump is not entirely due to a change in the base year: nominal estimates of U.S. GDP were roughly $550 billion higher than had been reported under the previous estimates. In large part, this is due to items like R&D and intellectual property within the NIPA, which have helped to bolster U.S. GDP.

Overall, the trajectory of the economic recovery has not been radically altered by the NIPA revisions. However, economic growth last year was stronger than had been reported under the prior estimates of GDP. Thanks to a solid increase in real GDP growth during the first quarter of 2012 (initial estimates had pegged it at 2% and it was just revised to 3.7%), the U.S. economy expanded by 2.8% last year. This is significantly higher than the 2.2% expansion recorded under the old methodology of calculating real GDP. Growth throughout the remainder of 2012 is estimated to have come in below previous estimates, but because the economy was growing from an elevated base in the first quarter of 2012 these reduced growth rates still yielded higher growth for the year than had previously been the case.

The current estimates show that the U.S. economy has experienced a slightly stronger rebound since the end of the recession that previously believed. Through June, the BEA reported that the U.S. economy had expanded by 8.1% since the end of the ‘Great Recession’. Current estimates place that at over 8.5%. The current BEA estimates put the U.S. economy at a level that is 3.9% higher (in the first quarter of 2013) than the pre-recession peak in the fourth quarter of 2007. Earlier estimates had the U.S. economy posting only a 3% rebound.

It is also important to point out that the economic downturn was revised as well. The ‘Great Recession’ no longer looks as severe as initial numbers indicated. For example, under the previous NIPA numbers, the U.S. economy contracted by 4.7% between its peak at the end of 2007 and its trough at the mid-point of 2009. That has been revised down to a 4.3% decline. Obviously, it was still a severe recession, though less than originally believed. Ultimately,, the BEA’s comprehensive revisions can be viewed in a positive light: Not only has the recovery been stronger than we thought, but the recession was also less dire than initially reported.

The BEA’s comprehensive revision also had a distributional effect due to the inclusion of R&D and intellectual property. Consumer spending, which has long been the largest share of the economy has seen a slight shift with its share shrinking in response to the inclusion of the additional category. Most other components of the economy were affected in the same way, which is largely to be expected: If everything must add up to 100% of the economy, than the introduction of a new category by definition has to come at the expense of shares of one or more components of the economy. There were a few surprises in the redistribution, however.

Intellectual Property Products, which had previously been excluded from the NIPA estimates, are estimated to represent roughly $630 billion in real terms during the second quarter of 2013. That equates to 3.9% of the U.S. economy. Logically, this would imply that the shares of other categories would drop by an equivalent amount, however most of the hit was absorbed by just two sectors: consumer spending and business equipment/software. Consumer spending fell from 71% of the economy to 67%, while nonresidential equipment and software fell from 8.5% to 5.8% under the comprehensive revision.

Most other sectors including inventories, residential investment, and nonresidential structures maintained relatively the same fraction of the economy as they had previously. One standout is Government, which actually saw its share of the economy increase under the comprehensive revision from 18.4% to nearly 19%. While every other part of our economy either shrunk or remained the same in response to these new introductions to the GDP accounts, Government is actually more concentrated within the economy than under the previous estimates. This is largely due to the fact that the U.S. government is one of the largest investors in R&D and in the accumulation of new intellectual capital. In that context, the uptick in the Government’s share of the economy is reasonable.

It will be interesting to see how these comprehensive revisions play out on a regional level. States like California, which dominate in the accumulation of IP (as measured by growth and/or share of U.S. patent filings, venture capital investment in the sciences, and research and development expenditures), could stand to benefit disproportionately from these changes. For that, we’ll have to wait and see. For now, the main takeaway is that the U.S. economy is in slightly better shape than believed prior to July 31, 2013.
 

CATEGORY: General Economy



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