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December 12, 2003

Is Growth Real? More on Inflation

The Bureau of Economic Affairs (BEA) has just done a massive reworking of how it calculates GDP, rejiggering numbers back to 1929. Nothing particularly sinister in all this-- it's done every few years-- although a little skepticism on political choices made is in order. The statistics agencies have a good reputation for independence, but...

However, on the topic of the odd calculations used to measure inflation based on qulaity improvements in technology (see this post), the BEA has thrown in the towel and admitted that it's "quality adjustments" were just mucking up the numbers. The result:

after adjusting for inflation and quality changes, computers contributed over half of the economy's growth in the second quarter. But, by another measure, computers accounted for less than a tenth of it...

In actual dollars, investment in computers edged up by a meager $6.7 billion to an annualized $93.5 billion in the second quarter.

The original report for the second quarter, by contrast, showed in inflation-adjusted terms that same category of investment surged by $35.8 billion to $354.9 billion, or close to half of the growth in GDP.

As the BEA noted in a recent article, the use of 1996 dollars significantly overstates the impact of computers on the economy "during the last half of the 1990s when computers experienced explosive growth and during the second and third quarters of 2003, when computer sales accelerated."

They haven't had a chance to rework the third quarter GDP numbers yet, but some analysts are expecting a revision downwards:
The third quarter 2003 growth, so loudly trumpeted by the administration at 8.2 percent, may similarly be revised down; indeed, it is likely to be so, since it is notable in the BEA's current revisions that it is the quarters of exuberant growth, such as the first quarter of 2002, that disappear when the arithmetic is done properly.
There seems little question that the economy has picked up a bit, but the mixed numbers mean everyone should be a bit skeptical of taking any one number, even the GDP, as signalling anything by itself.

Posted by Nathan at December 12, 2003 11:29 AM