Presenting Partner

Life Insurance Corporation of India

Moneycontrol

Budget 2022

Associate Partners:

  • Kotak Mutual Fund
  • Pharmeasy
  • Indiabulls
  • SBI

Presenting Partner

Life Insurance Corporation of India

Moneycontrol

Budget 2022

Technology Partner

Dell Technologies

Associate Partners

Kotak Mutual Fund
Pharmeasy
Indiabulls
SBI
UPCOMING EVENT:Are you 45+? Planning for retirement? We have just the right webinar for you - Planning for Retirement with Life Insurance on 27-Jan, 3pm. Register now!
you are here: HomeNewsWorld

US economy takes Olympic leap to add 3% to GDP

The changes - the Olympic Games of economic numbers, taking place once every five years on average - is aimed at more accurately reflecting the modern economy and will make the US the first country to adopt a new international standard.

July 29, 2013 / 06:56 PM IST

US economic history will be rewritten this week, as the most far-reaching methodological changes in years will add the equivalent of a country the size of Belgium to output in the world's largest economy.


The most important change by the Bureau of Economic Analysis, to be announced on Wednesday, will be to start counting spending on research, development and copyrights as investment, and reflect pension deficits for the first time. Combined they are expected to add 3 per cent to gross domestic product..


The changes - the Olympic Games of economic numbers, taking place once every five years on average - is aimed at more accurately reflecting the modern economy and will make the US the first country to adopt a new international standard.


More News From Financial Times
China growth concerns hobble rally
Pace of rally cools as China growth concerns linger
Equities pause as China concerns build
National parks hardly affect GDP
Economic Outlook: Britain's GDP update to rule on 'double-dip'

"We are carrying these major changes all the way back in time - which for us means to 1929 - so we are essentially rewriting economic history," Brent Moulton, who manages the national accounts at the Bureau of Economic Analysis, told the Financial Times in an interview in April.


The scope of the revisions will keep economists busy for months. For example, politically sensitive figures on the size and growth of the US government will change, because the revisions have no effect on past tax revenues. At a time when Republicans argue the growth of federal government is out of control, the revisions are likely to lower federal spending as a share of GDP by half a percentage point. They should also lower federal debt as a share of GDP by about 2 percentage points from 73 per cent in 2012.


But there are also two other layers of GDP data out on Wednesday, of which the shiniest and most visible will be the least important.


The top layer is the first estimate of second-quarter growth. It is generally expected to be miserable, with the consensus estimate at an annualised rise of 1.1 per cent. Some forecasts, such as that by Dean Maki of Barclays Capital in New York, are as low as 0.5 per cent.


Mr Maki said that consumer spending had slowed due to the lagged effects of tax increases and government spending cuts. "However, the contribution from trade and inventories now looks to be notably weaker than we had been assuming," he added.


Almost every forecaster thinks the dip is temporary and expects a bounce in the second half of the year as government spending cuts peak and the short-term drag of inventories falls away. For many, the weaker their second-quarter number, the more growth they expect during the rest of the year.


These short-term growth forecasts may be wildly wrong this month, however, because of the second layer of data: annual revisions to GDP for the last three years of numbers from 2010 to 2012. They will reflect updated source data, such as more detailed information from tax returns, as companies settle their accounts.


If the base level of GDP at the end of the first quarter of 2013 changes a lot, it may make estimates of growth during the second quarter especially inaccurate.


There is a decent chance that the size of the economy will be revised upwards because gross domestic income (GDI), an alternative measure of output, has been running well ahead of GDP.


If GDP is revised up to the level of GDI, it would change the picture of recent growth, with the economy expanding by 2.2 per cent in the year to the end of the first quarter instead of 1.6 per cent.


That would help to explain why US jobs numbers have been so much stronger than growth data and provide significant comfort to the US Federal Reserve as it considers when to start reducing its asset purchases from $85bn a month.

"We all should keep in mind that these are very rough estimates and they get revised," noted Fed chairman Ben Bernanke in recent testimony to Congress. For example, you get somewhat different numbers when you look at gross domestic income instead of gross domestic product."

first published: Jul 29, 2013 11:56 am
Sections
ISO 27001 - BSI Assurance Mark