Economy Leaped $650 Billion Today!

GDP: Before Recalculation (Source: BEA)

GDP: After Recalculation (Note 2011Q1 dipped into recession – Source: BEA)

Q2 GDP today jumped a whopping $649.2 billion over what was reported for Q1 GDP last month. The increase is more than an entire normal year’s dollar growth. That’s unheard of!

Don’t break out the champagne. It isn’t real. It’s a change in math.

As of today, the BEA altered the way it calculates GDP. That change will have a profound impact on how GDP is reported going forward. GDP is a fundamental measure of a nation’s economic health.

Not only that, but today’s adjustment changed history, too. GDP was recalculated all the way back to 1929.

This is not the first time the GDP calculation has been transformed. The BEA periodically adjusts it. Why?

“Keeping up with the Kardashians” is worthless

We live in a dynamic, changing economy. Things are a lot different today then back in the 1930s. The BEA tries to adjust the GDP calculation to reflect the changes.

Today’s modifications are the most dramatic since 1999 when the BEA altered how software purchases were recorded. Today’s may be the most adjustments ever.

As of 2007, in dollars, today’s changes are in:

  • Research and Development (+$300B)
  • Artistic Originals (+$70B)
  • Pension Accounting (+$30B)
  • Other Technical Changes (+$60B)

Instead of being recorded as an expense, R&D is now reported as a capital investment. It is the biggest single change to the calculation.

According to an April Financial Times report, it was estimated to add +2% and $300 billion to 2007’s total GDP.

“Artistic Originals” refers to the resale worth of movies, books, records, TV programs, plays and greeting cards. Now they, too, are considered capital investments. For example, the TV series Seinfeld has raked in a cool $3.1 billion since it went off the air back in 1998.

It is estimated artistic originals adds about +$70 billion to 2007’s GDP.

Ironically, AMC’s “The Walking Dead” is now considered an investment with syndication value so is counted in GDP, but “Keeping up with the Kardashians” has no such value, so is not included in GDP.

Before, company pension plans were only counted as wages. Now, added to that, promised pension payouts are also counted. That adds about +$30 billion to 2007’s GDP.

Other changes include all costs associated with buying a home treated as a capital investment. That adds +$60 billion more.

The BEA altered how the cost of managing bank accounts is figured. That affects PCE inflation index The Fed uses to make monetary policy decisions.

Conclusions

The BEA today made a number of significant changes to how GDP is calculated. In one month it grew an amazing $649.2 billion. Of course, it was due to the changes more so than reality.

$551.2 billion of that came from last months upward GDP revision.  That leaves actual GDP growth more normal at $102 billion and the reported 1.7% growth rate. That was better than expected and equity markets are up.

If not applied to history, though, GDP would have been reported at about +5%. The changes were applied backward all the way to 1929.

No one really knows how pervasive the new changes are, or their ultimate economic effect. For example, the BEA graphs above show that Q1 of 2011 went from a positive +0.4% growth to a negative -1.3% plunge.

It’s a huge change. If reported thusly in 2011 it would have put the markets into a tailspin.

Any economic parameter that depends on the dollar value of GDP has a domino effect.  For example, increasing the dollar value of GDP reduces the federal government’s debt level by several percentage points. That makes federal debt look much better today than it did yesterday.

More unexpected new GDP effects will be discovered over the next months and years.

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About azleader

Learning to see life more clearly... one image at a time!

Posted on Jul 31, 2013, in Business, Debt, economics, Economy, Government, Jobs, macroeconomics, news, Opinion, Politics, Thoughts. Bookmark the permalink. 6 Comments.

  1. I wonder when will other countries adopt the same calculation methodology. It is also good that the BEA will be calculating the GDP back to 1929, not only start from 2013.

    Nice article, keep it up.

    • Thanks for the compliment… the recalc for all years back to 1929 went into effect this morning.

      I downloaded all the data using the old GDP calculations last night… figure that will come in handy. 🙂

  2. Interesting that some quarters appear to be hardly affected by the change.

    • I noticed that to… I will have to chart the entire past to see all the effects. I haven’t done that yet. I did notice that the official “Great Recession” was shifted by one quarter in the historical data… but haven’t checked any further back.

      I’m wondering if some recessions may go away as a result of the change.

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