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

Growth: Why the Stats Are Misleading

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Lackluster Factory Performance

If this example had been arranged a bit differently, the substitution of a cheaper imported microprocessor would have translated into an apparent increase in output of domestically produced computers, even though nothing else has changed. In fact, this sort of problem probably helps explain why the Bureau of Economic Analysis reports that the domestic production of computers has supposedly risen by a factor of six over the past 10 years, despite the 40% decline in employment in the domestic computer-manufacturing industry. Meanwhile, according to official figures, the real value of imported computers has risen only by a factor of three over the same decade. As the old saying goes, "that does not compute."

The big implication: Manufacturing performance over the past decade, and certainly in the post-2000 era, has been a lot worse than we thought. Yes, consumers reaped the benefits of falling import prices—but that has proved more fragile, over the long run, than an increase in the productive capability of the country. You should think of this as the illusion of productivity growth, which helped sustain the over-optimism of the credit bubble.

Calculating the effect of the import-price problem on manufacturing growth is not a straightforward process. But let's assume import prices for motor vehicles, auto parts, computers, and other consumer durables should have been falling at least as fast as consumer prices (or domestic production, in the case of computers). That means that real growth of imported goods was faster than the numbers show. If we reduce manufacturing growth by a corresponding amount, the average growth rate of manufacturing output from 1998 to 2007 plunges to only 0.8% per year.

Now it's possible that the import-price problem is affecting other industries besides manufacturing. For example, some of the apparent productivity gains in retailing might reflect price cuts in imported goods that are being wrongly counted by statisticians as improvements in domestic operations. In that case the effect on manufacturing would not be quite as large.

"We don't dispute that there are tough measurement challenges in finance, imports, and innovation," says J. Steven Landefeld, director of the Bureau of Economic Analysis, which uses price data from the BLS to help calculate GDP. But he cautions that there may be biases in the statistics which run the other direction, including possible overstatement of medical-care costs.

World Problem?

It must be emphasized that the U.S. has the best system of economic statistics in the world. In fact, there's a good chance that similar problems are happening in other countries, including China. That would lead to global growth perhaps being significantly lower than we thought—but we have no way to know because other countries don't clearly explain their statistics the way the U.S. does.

That brings us to the final questions: How did we get into this situation, and how can it be fixed? There are two reasons the BLS has had a hard time tracking import prices. The first is conceptual: It's simply difficult to figure out the right way to do it. The BLS is exploring the idea of "input" prices, which would combine import and producer prices in a way that actually reflects the cost to domestic purchases. But that process is still at an early stage. At the same time, economists inside and outside the government are taking the problems a lot more seriously. "The import-price problem is potentially very important," says Susan Houseman, an economist at the W.E. Upjohn Institute who is organizing a November conference that will focus on the problems in U.S. statistics arising from increased globalization.

The second reason is budget, or rather the lack of budget. The U.S. is still ambivalent about being in a global economy. As a result, import-price tracking has not gotten the funding it deserves, given the growing importance of trade. Indeed, substantial budget cuts in both 2006 and 2008 forced the BLS to reduce sharply its coverage of rapidly growing areas of international services (think "offshoring" industries such as call centers and software services). "These are difficult measurement issues," says William Alterman, head of import and export prices at the BLS. "Although we have been able to conserve resources by automating the data-collection process where possible, much of the review and analysis of items is very labor-intensive, requiring economists who specialize in that particular industry or product area."

The new budget proposal from the Obama Administration is relatively generous to the BLS and the other statistical agencies. The reductions in the import-price program remain, but "we got a nice budget bump," says Keith Hall, the commissioner of the BLS. Still, he says, "that's just enough to maintain the quality of the current programs. The economy is constantly changing, and you have to get new measurement tools to keep up."

Mandel is chief economist for BusinessWeek.