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April 23, 2004

Has Trade Overstated GDP?

Look carefully at this graph from the Economist, which compares official GDP numbers with alternative measures of industrial production:

Note the sharp contrast between the supposed massive 8% GDP growth in the fourth quarter of 2004 versus industrial production growth of less than 2% in the same quarter.

The attached article notes the difference between industrial production and GDP numbers:

Industrial-production figures are likely to be the more reliable of the two, because they come directly from industry reports. In contrast, goods-sector GDP is estimated indirectly by adding together final sales of goods, changes in inventories and net exports. If goods-sector GDP is replaced with the industrial-production series in estimating GDP, then the economy grew by only 2.2% in the year to the fourth quarter, not the reported 4.3%.
Usually industrial production tracks GDP numbers pretty closely, but now we are seeing a divergence between GDP and industrial production-- and the anemic job situation which seems to reflect the industrial production numbers.

One culprit is outsourcing-- not just the raw fact that jobs overseas are cutting employment in the US, but a statistical problem. Since internal shipments within firms, especially services done at a distance, don't always show up in trade figures, sales in the US reflecting that foreign labor may incorrectly imply higher production actually in the US:

For example, when American firms outsource call-centre and information-technology-support jobs to India and other Asian countries, the result should be higher imports of services, yet official statistics do not show such an increase. America's recorded imports of software services from India are also much smaller than India's reported exports of such services to America.
Job growth may be inching up but view all the "growth" numbers with suspicion until hiring is as strong as the hype.

Posted by Nathan at April 23, 2004 07:53 AM