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A 21st century GDP
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October 28, 1999: 5:34 p.m. ET
Commerce introduces revisions to make GDP more reflective of economy
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NEW YORK (CNNfn) - Economic models of old have long suggested that strong growth and record employment -- a feature of the U.S. economy for several years running -- should eventually lead to the end of the business cycle.
That has yet to happen in the technology-based '90s -- something a growing number of analysts and economists attribute to rising productivity. Technology has made people work faster, has made their jobs easier and made the products and services they produce more competitive, forcing companies to keep costs and prices low.
That wasn't being reflected in the government's gross domestic product report -- the most broad measure of goods, services and investment the country has. Now, the Commerce Department has changed the way it calculates GDP to better reflect the less-industrial U.S. economy.
The revisions, which trace back to 1959, mean GDP now takes into account what companies invest in computer software -- one of the leading drivers behind the new-era productivity advances. They also boosted 1998 GDP to 4.3 percent and 1997's growth rate to 4.5 percent. Growth was initially recorded at 3.9 percent for both years.
At the same time, those revisions boost productivity levels among workers -- exactly what the new era, technology-based economy is about, said Brian Wesbury, chief economist at Griffin Kubik Stephens and Thompson. "All of a sudden, this mystery of strong growth and low inflation doesn't seem such a mystery any more," he said.
With the revisions, software that companies purchase is now considered a capital good rather than an intermediate expense, meaning it's considered part of their overall output. Because virtually every company now uses software to run its business, it makes it a better reflection of the current state of the economy, said John Ryding, a senior economist at Bear Stearns in New York.
Other revisions to the GDP numbers include:
- Calculating the output from the financial services sector and adding it into overall GDP. Prior to the revision financial services were not considered an industry with output because they did not produce anything physical.
- Reclassification of government pensions, which alters how Commerce calculates personal income and spending levels of Americans. The revision shifts savings of those funds from the government sector to the private sector, dramatically boosting personal income levels.
- Reclassification of private pensions, which alters the separate categories Commerce uses to determine where personal income comes from. The revision raises the level of corporate profits by adding in what companies pay into workers' pensions and takes out interest paid by employees.
- Reclassification of government capital transfers. Commerce no longer calculates state and gift taxes in its tally of personal taxes. It now considers it a transfer of a capital asset rather than a payment out of current income. The end result is a shift upward in a reporting of the personal savings numbers, though personal savings rates are still at historical lows.
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