The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates
Like the corners of my mind
Misty water-colored memories
Of the way we were
Gross Domestic Product (GDP) growth is how we gauge an economy. It's not perfect, but measuring the amount of transactions that take place over a period of time is probably
about the best we can do.
Thinking back over the last thirty years, there have been three recessions centered around 1990, 2001, and 2008. However we only experienced declining GDP during two of these as the economy
continued to grow throughout the 2001 "recession."
But memories of economic times fade - or better yet, data get revised. By design, data is backward-looking and sometimes it takes a few years to realize calculation methodologies must be updated and retrofitted.
This week, the Commerce Department redefined how it calculates GDP in order to include spending on the arts and R&D - if they are intended to create long streams of income. An odd consequence is that spending on TV comedies and dramas will be added to GDP while spending on game and reality shows will not - Friends has a longer shelf life than Survivor. Not to get too wonky, but basically they are redefining what fits under capital expenditures vs. consumption.
Source: Bianco Research
The current revisions will add to overall GDP going back in time, netting an increase in current annual output of $400 billion per year or about 2.5 percent - activity we didn't previously consider as part of the current economic strength.
Think of this as a shift upward in output, not an increase in slope or growth.
Nonetheless, we could see consequences on past "recessionary" periods as these figures are revised upwards. It's possible we even rewrite the 1990 recession to show no negative periods of growth.
Does this tell us anything about the economy today? Not likely.
Instead, Wednesday's release of second quarter GDP growth at 1.7 percent, much higher than the 1 percent expected, should take center stage. (Unfortunately, the outperformance was driven by inventory-building which will have to be reversed in the future.)
So, what good are these revisions?
The skeptical politico might assume this is just some trickery to convince the public the economy is performing stronger than previously thought. But it's probably more of a happy coincidence given the independence with which economic statistics are calculated.
Besides, growth estimates for the second quarter have been nose-diving since earlier this year, mirroring the experience for prior quarter estimations, as shown in the following graph.
Source: Bianco Research
The long period of 2.5 percent estimates that were in place a year ago are interesting in that this is the same level that economists believe to be "potential" GDP - loosely meaning "appropriate" GDP. For many years, economists have predicted a mean reversion in GDP and for many years the economy has underperformed.
Why such consistency in mean-reversion estimates? My guess is that it's just too darn difficult to predict GDP one year out - too many things can happen.
Think of the uncertainty we were facing a year ago including: the coming fiscal cliff, an uncertain Federal Reserve policy, lower payroll growth and an 8.2 percent unemployment rate, not to mention much of Southern Europe on the brink of default.
So, even with the disappointing performance of GDP so far this year, it is impressive to think of the obstacles this economy has overcome. Or have they simply been pushed forward?
*Barbara Streisand, of course!
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