This was from last weeks BW. When you read it and contemplate what Glassman is saying recently, it appears that the fed in part is not only saying that they are missing part of the gains in the economy but they are trying to get new metrics to account for it. Ergo the "new economy" exists after all, decloaking or leaving stealth mode. Also, these corrections may go back as far as 1959. The impact? All of a sudden, high tech can look awfully cheap and then we play catch up for a few years. Kind of sound like prelude to Glassman's 36K. Somewhere between 28 October and the end of November the markets and in particular the techs and .coms may be in for one hell of a rally, just like last year.
Regards
New Math for the New Economy
For the past few years, government statisticians have felt like greyhounds chasing a mechanical rabbit. No matter how often they revise and update data, they can never catch up with the economy's pace of change. The effects of the Information Revolution in particular have proved hard to pin down.
But now the Bureau of Economic Analysis is about to make another stab at capturing the New Economy in government data. Starting in late October, the Commerce Dept. will finally acknowledge that business spending on software is an investment, just like spending on computers and communications gear. That means, for the first time, business software will be counted as part of gross domestic product. 'We will now recognize that software has a long purchase life,' says Brent R. Moulton, a top economist at the BEA.
This single change will have an enormous impact on growth, investment, productivity, and inflation. The BEA will not release its estimates until Oct. 28, but it has described its methodology. Based on that, BUSINESS WEEK estimates that software will likely add 0.15 to 0.3 percentage points to annual GDP growth over the last three years--a significant increase.
GROWTH JUMP. Because the BEA will recalculate GDP for earlier years as well, growth rates will be raised as far back as 1959. But the changes will likely be bigger in recent years. 'Because software use has accelerated recently, you have to assume the '90s will have higher growth rates relative to the '80s,' says Michael R. Englund, chief economist at Standard & Poor's MMS. 'It's a repeat of the New Economy claims.'
And since growth will be higher than previously estimated, productivity will likely be revised up as well, notes Lynn Reaser, chief economist at Bank of America Private Bank in Jacksonville, Fla. In addition, capital spending will go up from its already high levels. In the second quarter of 1999, for example, capital spending per employee in the private sector was running at an annual rate of nearly $8,000, about half of which was spent on information technology, Reaser says. The new revisions could boost measured private-sector investment in information technology by a full third. 'This goes a long way toward explaining the exemplary performance of the U.S. economy in recent years,' says Reaser.
Moreover, the BEA will calculate a price index for both prepackaged and custom software. The exact figures won't be known until the October release date, but the BEA's discussion makes it clear that the new data will show software prices falling, perhaps by 5% or more annually. That will pull down the inflation rate by some amount.
The BEA will make other changes to the data in October, besides introducing software into GDP. A better handling of government employee retirement plans will have the effect of increasing personal savings. And improvements in tracking the financial sector could affect growth as well.
Moreover, the BEA will likely adjust the data to eliminate part of the statistical discrepancy between GDP and gross domestic income. In theory, these measures should be equal. But over the last three years, the discrepancy has built up to 1.4% of GDP, close to the largest on record. If the October revision eliminates half that, the growth rate for the last three years will bump up 0.2 percentage points more. This still may not describe the full effect of the Internet boom, but it's a lot closer than the figures we had before.
By Michael J. Mandel in New York and Laura Cohn in Washington |
