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Economic Indicators June 3, 2009, 7:54PM EST

Growth: Why the Stats Are Misleading

The BLS data miss crucial import-price shifts. When missing info is factored in, the U.S. economy over the past decade looks worse than we thought

By Michael Mandel

1.7%.

That's the annual reported growth of real gross domestic product per full-time worker from 1998 to 2007, according to government figures. "The amount that U.S. workers produce has grown at remarkable rates in recent years," gushed the 2007 Economic Report of the President. These productivity gains are usually held up as proof that the U.S. innovation machine has continued to thrive despite all sorts of obstacles.

But unfortunately, productivity growth may be overstated for two reasons. First, the economy was lifted by two financial bubbles in a row—the stock market bubble followed by the credit bubble—leading to excess growth of finance and real estate. "The financial sector contributed substantially to the surge in productivity growth," says Martin Baily, a Brookings Institution productivity expert. "Some of the financial innovation has turned out not to generate real benefits."

Second, new research by Emi Nakamura and Jón Steinsson of Columbia University suggests pervasive problems with the government's import-price statistics. One example: Figures from the Bureau of Labor Statistics seem to show that the reported price of imported furniture rose by a total of 9% from 1998 to 2007. But how can the import price of furniture have risen over a stretch when the price paid by consumers fell by 7%? Or take computers. Official stats indicate that the price of computers for consumers fell at an average annual rate of 22% a year from 1998 to 2007, which seems to fit with personal experience. However, the import price index for computers shows a drop of only 8% per year over the same time, which seems unlikely. Similar problems occur for other imported consumer durables, including motor vehicles and parts.

Small but Persistent Errors

Like a slow water leak that eventually erodes the foundation of a house, these apparently arcane import-price problems mean that the real growth of imports has been significantly underestimated for goods such as computers that have rapid model changes. That in turn distorts the productivity and growth stats, making them look a lot better than they really are. Adjusting for the finance bubble and the import-price problems means economywide productivity growth may have been about 1.3% per year rather than the reported 1.7%. Similarly, real growth of gross domestic product falls to roughly 2.3% annually from 2.7%. (The exact size of the downgrade depends on what is assumed about the correct change in import prices.)

That's bad enough, but the real downgrade comes in the manufacturing sector. Official stats seem to show that U.S. manufacturing output grew at a 2.6% annual pace from 1998 to 2007, a strangely positive picture considering how many factory jobs were lost and how much production was shifted overseas. After the adjustments, however, the new growth rate for manufacturing output might be as small as 0.8% a year, and factory productivity growth becomes weaker as well. The conclusion: You can't depend on productivity and output growth to make a case for strong innovation.

Why do these two factors make such a big difference? In the official statistics, the finance, insurance, and real estate sector grew at a 3.4% annual rate—substantially faster than the 2.7% of the rest of the economy. If we assume that the extra growth is an illusion caused by the two Wall Street bubbles, that knocks about 0.2 percentage points off the growth rate of both real gross domestic product and economywide productivity,

The more interesting issue comes up when we look at import prices, one of the least appreciated of the price statistics the government publishes. The import-price index tracks the change in the price of goods and services coming into the U.S. It seems far less relevant to most people than either the consumer price index or the producer price index (which tracks the price paid by businesses to U.S. suppliers). In fact, many textbooks, including my own, Economics: The Basics, don't even mention import prices.

Wrong Prices Skew Output Figures

But import prices are a big deal—and to understand why, you have to know a bit about the way that the Bureau of Economic Analysis calculates GDP. The oversimplified picture: Statisticians look at how much is bought by American consumers, companies, and governments, and by foreigner purchasers of U.S. exports. Then they subtract out imports. What's left is U.S. output, also known as domestic value-added, or production.

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