Is the GDP Report Really Important?
Today’s GDP report is proof of something that many have long suspected. Not, as the first headlines shouted, that the U.S. economy is in trouble, but that we need to stop using these numbers as proxies for how we are faring as a nation.
This morning, the federal government released its initial estimates for economic growth, showing the U.S. economy expanded by 1.5 percent in the second quarter. That was immediately characterized as “weak” and “sputtering” by pundits and politicos, and described as insufficient to generate enough employment to move the needle on the stubbornly high rate of joblessness.
At the same time, however, the Bureau of Economic Analysis, which is in charge of official Gross Domestic Products reports, announced that it had revised economic growth for the past few quarters upward, with the first quarter now showing growth of 2.0 percent instead of 1.8 percent, and the last quarter of 2011 showing 4 percent growth instead of 3 percent. Many of those are hardly minor revisions, and if those had been the numbers released at the time, the spin would have been quite different. In fact, it would have been more positive and may well have changed the entire tenor of our public debate over whither the American economy.
The way these reports have become embedded in our culture as definitive markers for how we are doing is unhealthy. The political demand for clear markers and the media hunger for stories lend undue weight to official economic releases that are always provisional at first and subject to significant revisions over time. That is especially true for GDP and unemployment numbers. The United States has a population in excess of 300 million people and an immensely complicated and vibrant commercial system with multiple variations across regions, demographics, race, and age. One synthetic number such as a GDP figure is useful as far as it goes, but not as it is currently used.
You can parse through these reports for an immense amount of information on spending behavior of consumers, on government outlays, the savings rate, how many cars were purchased, how much inventories grew or shrank, and how much the United States imported or exported. You will find, for instance, that the savings rate is down a bit from last year at 4 percent but still healthily higher than it was during the housing boom/bubble when it rested at zero or below. You will find that government spending continues to contract modestly, and that people bought fewer computers.
But that wealth of data rarely makes it into public discussion. Instead, we latch onto the number and use that as a symbol of everything else. Over the past few decades, GDP has become the sound bite of economic data: quick, easy, simplistic, and often misleading.
Think about it: If it had been announced that the economy expanded at a rate of 2.5 percent, the reaction would have been gleefully positive from the media and financial world. Yet that number—or even a succession of higher numbers—would have little tangible effect of the tens of millions without college degrees who are seeing eroding employment and dwindling wages. They have been on the receiving end of those trends for more than 30 years, as wage data shows, and that is through periods of much higher GDP growth, and a few of much lower. On the flip side, those who are truly prospering in this system would not find their lives or business dramatically impacted by negative GDP growth, unless it was in the context of a global panic such as occurred in late 2008 and into 2009.
The fetishizing of GDP and other official statistics is a recent phenomenon. These numbers didn’t even exist in any consistent form until the 1940s and they weren’t released with any fanfare until the 1950s. Now, they are the alpha and omega of public discourse about our economy’s fate, national power, and elections. In the process, they replace serious discussion about what is working and what isn’t—back to the fact that good GDP hasn’t raised wages for the working class and poor GDP hasn’t prevented companies and some individuals from thriving. And the fact that the numbers are subject to such change and revision should be proof enough that using them as clear snapshots in real time is a mistake.
Finally, today’s number is just OK enough to make the accusations of a faltering recovery more problematic and just weak enough to make claims of an accelerating economy hard to justify. In short, it maintains the political dynamic of Republicans assailing Democrats and the Obama administration for failed economic policies and Democrats claiming that the road to recovery may be long but progress is steady. Like recent employment reports, these numbers are muddled enough to make them subject to the eye of the beholder, which guarantees another five months of unresolved debate, confused signals, and popular unease about an uncertain economic future.
And that is one more reason, if another is needed, to step back from such reliance on these numbers as ultimate measures and begin to speak about the details, about education gaps and innovation centers, about positive progress on restoring consumer balance sheets and reducing debt and negative movement on government balance sheets and how we spend publicly, and about a world seeing significant headwinds from Europe and continued tailwinds from emerging economies. That would be the beginning of a real conversation about the world as it is, using GDP as one marker among many, not as the end of the story but as the beginning.