First we had China's "overcooked" GDP data, then came Australia's "technical issues with jobs data," and now, with Jack Welch having questioned America's jobs data in 2012, Bloomberg reports that top officials from two US government economic-statistics agencies said their measurement tools for growth and inflation are off.
Economists for years have questioned whether statistical agencies are keeping up with changes, resulting from an increasingly digitized and innovation-based economy, that improve the quality of goods and services.
As Bloomberg reports, the answer, as per a new paper from government officials at the Bureau of Labor Statistics and Bureau of Economic Analysis: It’s hard, especially in technology and medical services where innovations can be rapid and the results hard to capture. Health-care spending represented about 17.5 percent of gross domestic product in 2014, they note.
Officials warn their measurement tools are understating growth and overstating some components of inflation by modest amounts, while cautioning that this doesn’t explain the sluggish expansion in recent years... "price index mismeasurement continues to lead to understated growth in real output over time."
Despite the BLS’s improvements in capturing changes in the economy, “our quality corrections are not as complete as they could be, so they are not taking into account some of the innovations that are actually going into the goods,” said Erica Groshen, one of the paper’s authors, who served a four-year term as BLS commissioner that ended in January.
Looking at the personal consumption component of GDP, the authors find that price measures likely show an overstatement of 0.2 percentage point in 2000, rising to 0.26 percentage point in 2015.
Combined with some mismeasurement of quality changes in computer and software investment, the total effects would mean GDP growth is understated by about 0.4 percentage point for 2000, 2005, 2010 and 2015, according to the paper.
“For GDP and productivity growth,” the paper’s conclusions “make a lot of sense but don’t really change the overall picture of a productivity slowdown,” said Julia Coronado, president of MacroPolicy Perspectives LLC in New York and a former Fed economist. “It is more of a game changer for thinking about inflationary pressures.”
Of course, over-stating inflation provides The Fed even more historical cover to remain 'easy' should the need arise.
* * *
Full paper below: