The first estimates for US real GDP growth for Q2’2013 were released today. They show that the US economy grew at an annual rate of 1.7% in the last quarter of this year. Also, significant was that real GDP growth for the first quarter of 2013 was revised down to a 1.1% annualised rate. Assuming these figures are not subsequently revised significantly, and they often are, then they suggest the US economy grew at around a 1.4% real rate in the first half of 2013. This is clearly below the historic trend rate of around 2.5% a year since 2000 and well below the average rate since 1929 of 3.3% a year. Most important, the rate is still below the necessary ‘recovery’ rate for getting unemployment down to pre-crisis levels any time soon. However, most mainstream economic forecasters think this slower rate compared to the 2.8% (revised) rate achieved in 2012 is temporary and they expect a bounce in the second half of the year as government spending cuts peak. For many, the weaker the second-quarter number, the more growth they expect during the rest of the year. We shall see.
But it’s very difficult to know because these Q2 figures coincide with major revisions by the US Bureau of Economic Analysis (BEA) to how it measures GDP and also to its measure of the last three years of GDP growth. You see, every four or five years, the BEA updates its methods for estimating GDP—the last effort was in 2009. This time, the BEA has made major changes, adding to GDP things like business investment in research and development and intellectual property like recorded music.
The most important change is the reclassification of “intangible” asset spending as investment – the largest item being research and development spending. The BEA defines a fixed investment asset as anything that can be used repeatedly or continuously in the production process for more than one year. If the car company were to invest in, say, a new plant, the plant would be scored in GDP as fixed investment. R&D spending has the character of “investment” – long-lasting, and repeated use and benefit in the production process. The BEA argues (I think correctly) that including R&D in investment will allow “users to better measure the effects of innovation and intangible assets on the economy.” Essentially it will recognize the growing importance of intellectual property for business and productivity. As Marx said: “The accumulation of knowledge and skill, of the general productive forces of the social brain… (are) absorbed into capital”. (Marx, 1973, p694).
In addition to R&D spending, BEA is capitalising into fixed investment various intangible assets in the entertainment sphere, which will now be counted in investment and GDP. These include long-lived television programs, theatrical movies, books, music, and other miscellaneous entertainment that BEA says have a useful lifespan of more than a year. Currently these are classified as expenses that are consumed as part of the production of other goods and services. Also, less convincing, certain closing costs will also be capitalized within residential investment. These are expenses associated with the acquisition of residential structures. Currently, only brokers’ commissions on the sale of homes are capitalized and counted as GDP.Altogether, these revisions add $526bn to current dollars 2012 GDP. Along with the other statistical revisions, the US economy is now regarded as $560bn larger than previously thought, or about an extra 3.6%.
The new methodology pushes up the estimates for corporate profits, as companies will no longer be counting net R&D after depreciation as a cost, the savings rate for individuals and government will rise to reflect the increase in capital investment. But the revisions also change the cyclical movement of corporate profits, with a downward revision for the ‘neoliberal’ period 1986-2001, but up from then on.
The US economy may be larger, but is it healthier? In other words, do the revisions make any difference to our measure of how fast the US economy is growing and recovering? Well, according to the BEA, the US average annual real GDP growth rate since 1929 is revised up from 3.2% year to 3.3% a year. Now during the Great Recession from the beginning of 2008 to the middle of 2009 , the US economy contracted at a 2.9% annual rate compared to the previous estimate of 3.2% a year with the cumulative decrease now 4.3% compared to the previous 4.7%. And now the BEA says that during the ‘recovery’ from mid-2009 to the first quarter of 2013, the US economy grew at 2.2% a year compared to the previous estimate of 2.1% a year. Given that the rate of inflation was revised down by 0.1% annually for that period, there was no change in the estimate of the nominal growth rate of US GDP from mid-2009 onwards. So the characterisation that the US economic recovery has been weaker than any others in the post-war period is not changed.
Doug Short, as usual, provides an excellent graph that shows the annual real GDP growth for the US economy (including the revisions).
The US real GDP growth rate has been slowing secularly, with the ten-year average now down to 1.7% a year. And as Doug concludes: “The latest data point (1.43% yoy) is lower than the onset of all recessions except the one triggered by the Oil Embargo in 1973, with which, at two decimal places, it’s tied.”