Listen to this article
The good news for the people of the US is that they all produce $1,783 more per year than was previously thought. The bad news is that they cannot take the money to the shops, because it only exists on paper, after massive revisions to the national accounts by the Bureau of Economic Analysis.
The most extreme methodological makeover in years not only shows the world’s largest economy is bigger than previously understood but suggests the Great Recession of 2008-09 was not as deep either.
Revisions of this scale occur only once every five years when the BEA not only updates its data but revises its methods as well and applies the new techniques all the way back to 1929. The big change this time is an expanded definition of investment, taking in intangible assets, which added 3.6 per cent, or $559.8bn, to the size of gross domestic product in 2012.
Here are some of the big changes and their implications for the US economy.
(1) The recession
The revisions give us a new picture of the Great Recession. It turns out to be a little shallower than previously thought with a stronger recovery.
The change is likely to be important to the US Federal Reserve because it lines up better with relatively strong jobs growth and will add to confidence in the health of the recovery.
Growth in 2009 was revised up by 0.3 percentage points and now shows a decline of 2.8 per cent. The is was mainly because of changes made to “unpriced banking services”, said Nicole Mayerhauser, chief of the BEA’s national income and wealth division.
Bank accounts are often free, or have a limited direct cost, so the BEA has to estimate the value of that service for the national accounts. It does so using the interest rates banks make and pay – but credit losses during the recession made accounts look more expensive than they really were. “We’re better capturing the actual service provided by the banks,” said Ms Meyerhauser. “We were overstating the price of those services before.”
The 2012 figure was revised up by 0.6 percentage points and now shows growth of 2.8 per cent – rather than weakness last year, the economy was actually pretty strong. This was predominantly due to stronger figures on housing, reflecting a new rental survey from the Census Bureau, and for construction.
(2) The US economy is 3.6 per cent bigger than previously thought
|Register for FT.com|
|If you enjoy economics articles like these, register today on FT.com to see up to eight free stories a month|
The scale of the long-term revisions was even bigger than expected. Changes to the way GDP is calculated added 3.6 per cent to the size of the economy in 2012.
The biggest source of the changes was the shift to treating research and development as investment instead of a cost of producing other products. By itself that added 2.5 percentage points to the size of the economy.
“We’re all about being relevant and that is what this comprehensive revision is about as well,” said Steve Landefeld, the director of the BEA.
The goal of the revisions is to better reflect the changing pattern of the economy. Whereas before, companies invested in machinery, now they are more likely to invest in intangible assets such as research.
Counting book, movie and music copyrights as investment added another 0.5 percentage points to the size of the economy. Transaction costs when somebody buys a house – such as the estate agent’s commission – were also moved to investment and added another 0.3 percentage points to GDP.
As investment has built up over time, the revisions did not make a big difference to the pattern of economic growth. The estimated growth rate from 1929 to 2012 was revised up by an average of 0.1 percentage points to 3.3 per cent.
“I do want to hasten to reassure you that, because we take these all the way back to 1929, they do not have a dramatic effect on the pattern of economic activity,” Mr Landefeld said.
Economists are likely to take some time to digest the data as they affect pretty much every model and theory on the subject. One thing they may help to explain is the apparent weakness of investment in recent years – some of it may have been failure to measure intangible assets properly.
(3) The personal savings rate looks higher
There was a big economic debate before the Great Recession about why US consumers were only saving 1 or 2 per cent of their income. The rate no longer looks quite as low with upward revisions of around one percentage point in many years.
“Personal saving is another measure that has been affected by these changes. In this case it’s really the new pension treatment that is the main source of these revisions,” said Brent Moulton, who manages the national accounts at the BEA.
Before the revisions, the BEA counted cash paid into pensions, but if a company simply promised to pay in the future that was not counted. Now the full value of pension promises by companies and the federal government, as well as interest on the bit that was not paid up, will count towards GDP.
“We’re now counting the accrued interest on unfunded pension liabilities,” said Mr Moulton. “That counts as both income for the household sector and also an expense for the employer sector.”
The revision to the savings rate may affect economic debates about the sustainability of consumption in the US. If consumers are saving more than it may be easier for them to keep spending.
Get alerts on Federal Reserve when a new story is published