Who says that you can't rewrite history? The recent announcement by the Bureau of Economic Analysis (BEA) announcing the results of the 14th comprehensive analysis of the National Income and Product Accounts (NIPA), also known as the nation's GDP by the sweaty masses, is the BEA's way of rewriting the past, all the way back to 1929 when most of our great grandparents or grandparents were suffering through the worst economic contraction in recent economic history.
Every five years or thereabouts, the BEA examines the source data behind the U.S. GDP data and revises what goes into calculating the size of the American economy and the level of economic growth. Once these calculation changes are adopted, to maintain some semblance of consistency, the changes are applied all the way back to 1929.
Let's open by looking at how GDP is calculated.
GDP = gross investment + government spending + private consumption
Note that government spending is net of imports. By increasing the influence of any one of these factors, GDP will rise, showing the importance of the BEA's revision process.
This time, there are four main conceptual changes:
1.) Research and Development is now capitalized.
2.) Entertainment, literary and artistic originals are now capitalized.
3.) Residential housing ownership transfer costs are capitalized on an expanded basis.
4.) The accrual treatment of defined benefit pension plans has changed.
In addition, major "table" changes were made to reflect:
1.) Intellectual property products.
2.) New pension tables.
While a discussion of most of these changes would be enough to induce involuntary sleeping among the non-accounting people among us, there is one key change that is rather surprising; the inclusion of the capitalization of entertainment, literary and artistic originals and intellectual property products. By affecting these changes, the BEA is increasing the size of the gross investment number with the new inclusion of research and development spending, art, music, film royalties, books and theatre. The United States is way ahead of the curve on this one, being the first in the world to adopt such a wide range of "investment" items. Unfortunately, it means that we can no longer compare apples to apples when comparing U.S. economic growth rates to those of the rest of the world. That's a topic for another posting.
First, let's look at how much these changes to the calculation of GDP has actually affected GDP growth rates back to 1929:
Naturally, the changes have less impact the further back that we go, however, over the past five years (between 2007 and 2012), the impact is noticeable. Average annual economic growth, although very, very tepid compared to the past 80 years, moves up from 0.6 percent under the old schema to 0.8 percent, an increase of 33.3 percent. It also pushes up the annual economic contraction rate between the fourth quarter of 2007 and the second quarter of 2009 from -3.2 percent to -2.9 percent. See, that bad old Great Recession was nowhere nearly as bad as we all thought!
The biggest positive impact of the new GDP calculation was in 2012 as shown on this bar graph noting that the dark blue bar shows the total impact of the changes and the other bars show the impact of each factor on the total:
The new and improved GDP for 2012 rose by 2.8 percent rather than the even more pitiful 2.2 percent previously touted by the BEA. The biggest improvement of all was seen in the first quarter of 2012 as shown on this bar graph:
For that quarter alone, the newly minted GDP growth rate of 3.7 percent was nearly twice the old rate of 2.0 percent. By any measure, that's a robust period of economic growth, similar to what was experienced, on average, between 1929 and the Great Recession as you noted on the first graphic.
What does all of this mean? GDP for 2012 is now $16.2445 trillion, up from $14.4179 trillion in 2009 and $14.4803 in 2007. For 2012 alone, the upward revision was $559.8 billion when compared to the bad, old way of doing things. This also has an additional unintended consequence; the U.S. debt-to-GDP level now looks somewhat less frightening than it did before. With the debt including both debt held by the public and intragovernmental debt sitting at $16.433 trillion on December 31, 2012, the new and improved GDP numbers give us a debt-to-GDP ratio of "only" 101 percent. Under the old scheme, the debt-to-GDP was a completely unacceptable 104.8 percent. Sadly, all of that is academic now since the debt has long passed the level seen back at the end of 2012.
While I understand that the methodology behind the GDP calculation has to change to reflect changes in technology and other key parts of the economy, the apparent newfound, relatively robust, growth in the economy since the end of the Great Recession is little more than smoke and mirrors. In addition, looking back at the historical record, we can see that the level of economic growth in this cycle is still pathetic no matter what accounting magic is used by the BEA to make it look better.