Are official statistics exaggerating America's growth?
economist.com
Grossly Distorted Product
Apr 7th 2004
From The Economist print edition
Are official statistics exaggerating America's growth?
DESPITE the welcome leap in American employment in March (see article), America's job market has been surprisingly weak in the past couple of years—surprising, at least, to economists. Some have explained this by pointing to rapidly rising productivity figures. Perhaps firms have not needed more workers. But there is another explanation: America's GDP figures, which have been strong, may be inaccurate, and may be exaggerating the extent of economic growth.
In the two years to the fourth quarter of 2003 America's real GDP grew at an annual rate of 3.6%. Going by past recoveries, this should have meant a rise in employment of 2% a year. Instead, non-farm payrolls have fallen. Most economists say that this reflects a sharp increase in productivity growth. Jan Hatzius, an economist at Goldman Sachs, is not so sure. Other economies that have enjoyed rapid productivity gains in recent years, such as Canada and Australia, have also seen strong increases in employment.
Nor does Mr Hatzius accept the argument that the employment figures have been understating job creation. It is too soon to tell whether March's data (which were published after his study) mark the start of a delayed catching-up. This leads Mr Hatzius to suggest that GDP is being overstated. The standard measure of GDP is calculated by totting up aggregate expenditure; but another estimate, found by summing incomes—which in theory should be the same—says that GDP has grown at an annual rate of only 2.8% since the end of 2001, 0.8 percentage points less than the expenditure measure.
Another piece of evidence is the unusual divergence of the growth rates of GDP in the goods sector and of industrial production. The two series used to track each other closely; but in the past two years a wide gap has opened up (see chart). In the year to the fourth quarter, industrial production rose by only 1.4%, while goods-sector GDP surged by 8.0%.
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%.
Why might official statisticians be overstating America's GDP—and productivity with it? Mr Hatzius suggests that they may be undercounting imports of intermediate inputs of goods and services produced abroad by American firms that have outsourced jobs to cheaper countries. Since GDP is calculated as domestic spending plus exports less imports (including imports of intermediate inputs), this would lead to an overstatement of GDP.
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.
If Mr Hatzius is right, then jobs have been slow to pick up largely because this has been, at least until now, an exceptionally weak economic recovery. That is exactly what you might have expected after the bursting of the biggest financial bubble in history. |
